dividand Vs Warren buffett

Warren Buffett is one person that does not believe in distributing dividend. His company Berkshire Hathaway always attempt to retain every1$ and make that 1$ worth 2$ or more. Buffett says that if investors want cash they could sell a small percentage of their shares but as long as the company has great projects or investments to make the money will be used on those. 

His secret of being one of the richest men in the world is his ability to find the right company, which he always choose the big companies and buy big amount of shares, to make sure that he get a seat at company investor meetings.

His thinking on dividend agrees with the theory of Modigliani and Millar's idea of dividend irrelevance theory. However, will all investors like this? Because, there are investors who will demand for their returns as dividend every year.  All investors are not indifferent. 

However, Berkshire Hathaway is a successful company even without any dividend payouts. I believe this is something to do with Warren Buffett's reputation an intercity. Investors trust Warren Buffett as a leading investor  in the world makes them the assurance on their invested money. This conclude that even managers could build trust among investors, especially among investors who are concerned on long term investments to hold the investments with the firm even without dividend payouts, but emphasizing on shareholder value creation. This will enable the company to retain money to invest in much more profitable investments and projects to create long term value in return.

Source : http://video.pbs.org/video/1907176086/
              http://www.youtube.com/watch?v=aL766NK2ynw

Capital stucture: What's best for shareholders.

 Business firms are aware that raising funds through equity finance is expensive and also, financing through debt is risky. Firms need to find out the optimal level of both combination. Capital structure it self will not create shareholder wealth.

This clearly shows on Tui Travel PLC, which is the Europe's biggest travel group, formed by  the merger of Tui AG in Germany and UK's Fist Choice in 2007. At its formation Tui Travel has taken £900m ($1.4bn) loan from  Tui AG, which is at a quite low cost and low interest rate. However, in 2009 company announced to issue convertible bonds to refinance the loan of £900m, which the settlement took place in 2010.  Until 2010 though the company was financed by debt it it was making losses continuously since 2008 till 2010. However after refinancing the loan by the issue of convertible bonds, even though it is highly costly, Tui travel reported a profit in 2011 £114m profit before tax. 

How sure investors are on their SRI?

Socially responsible investors encourage corporate to engage in practices that promote environmental stewardship, consumer protection, human rights and diversity or in other words to they promote attain sustainable, ethical investments. Though most investors are seeking to find SRI on their investments, but they can never be sure as the information that investors could access is limited. Their decisions mostly tend to depend on company annual reports and publications.

Therefore I see the concept of SRI as promoting element by big companies to attract investors and not that they really practice the meaning.

Today BBC reported that most big multinational companies start their main supply chain at mostly under unethical grounds. One company I noted was Mark & Spencer. Mark & Spencer is well known for ethical investment. However suppose it is not a 100% ethical business. The report on BBC said that most of cloth makers get their raw materials like cotton from India and most of the cotton farms that employed by children. They have no safety cloths, no proper wages. Mostly these children do not have the chance of going to school.

Somewhere in the middle of the supply chain though it gets better, but there is no one to take care of these children, who are engaged in the initial process of creating cotton cloths.  Companies charge high from consumers for their ethical business, but the benefit of the extra charge does not seem to help those poor farmers at the initial stage of the supply chain. 


In reality no any investor who will get in to with such details at the bottom.  

Financial crisis:are the lessons about ethics

Financial crises over last three decades have left many conclusions and things to learn. Some economists blame regulations, especially deregulation which occurred during 1990s. Meanwhile some blame unethical practices and greed for money. However most of these cases managers are blamed for their greed and lack of ethics in the market. Unless managers have attempted to do scandals, greed can be good. Because managers are tempted for their bonuses, and bonuses depends on profits which maximize shareholder wealth the fundamental mission of a financial organization. So what is really wrong? I think the problem is not with ethics or regulations, but again issues with managers, because managers have ignored the "long term" shareholder wealth maximization. During past credit crunches they have all looked at short term and have not considered  the risk in long term. 

 

 On the other hand if regulators can identify financial bubbles, where all most every participants in the market have unusual growth while the market size is the same, then regulators will need to look more carefully than complementing the market growth.

Source : http://www.ft.com/cms/s/0/dd14e65e-28e6-11e0-aa18-00144feab49a.html#axzz1pUfjNBjF

M&A is it really to create shareholder wealth?

In theory there are many motives behind M&A, and at the bottom M&A should generate  shareholder wealth. However in the real corporate world most examples of M&A are failures and shareholder value distractions, for example the merger of Time Warner and AOL.  

However, when looking at M&A happened between First Choice PLC and the Germany company, TUI AG which merged during September 2007 it confirms that Merger It self will not create shareholder wealth or either will not destroy. In my opinion it completely depends on how best the decision match the business, market and capabilities.  When looking at the above example, the merge of two companies formed the market leading TUI Travel on 7th September 2007. TUI AG have a 50% stake in the new firm , with First Choice controlling the remaining 49%. This merge was expected to achieve synergies of £100 million. After this announcement, TUI's shares has raised by 10% , while First Choice's shares also has raised by 8% in London during 2007.

The merger has been announced after months later its main rival Thomas Cook group merged with My Travel. Hence TUI would have wanted to gain the market leading position putting Thomas Cook in to second.  However TUI began to have a higher share price only after 2008 second half.

 


Share price movement of Tui Travel and Thomas Cook since Sep 2007- Sep 2010

Besides, TUI profits have not been too good since the merge till 2011.  It has taken four years for TUI travel to make a good return for shareholders. In my opinion M&A cannot blankly accept for shareholder wealth maximization at the bottom. It could be used as a business survival and to maintain competitive advantage, which in-turn will increase shareholder wealth. However, the time horizon is important. As it for TUI, it has taken 4 years for a positive earning.  

 Sources :

Financial times, (2007) Available at: http://www.ft.com/cms/s/0/815b3cce-d583-11db-a5c6-000b5df10621.html#axzz1oraGuXH7

BBC N\news (2007) Available at : http://news.bbc.co.uk/1/hi/business/6720995.stm