Today's blog is about financial ethics. Two consecutive weeks in lectures and seminar I've been learning about it. I think it is mostly about common sense and what we have experienced about it in real life workplace. I used to work in a company back in my hometown, as a part-time accountant assistant. Although it was just a temporary job, it was something I have learned a lot about being ethical. Being ethical means to eliminate self-interest, having good moral, being professional, follow the law and the list goes on.
There are not many news about financial ethics but here is one about Volkswagen. According to Financial Times (2015), professor of business ethics complained that Volkswagen cheats their emission tests. It is a procedure where cars have to be tested to know whether they meet the standard or not. The companies used clever software to detect when certain diesel models were subject to emission tests and to send the engines into a special low-emission mode. It seems like the engine management software could detect road wheel rotation speeds, steering inputs and use of accelerator to make this determination. This is why VW were under pressure of not having the new model vehicle. VW came clean eventually and admitted that 11 million vehicles were affected worldwide.
Of course, fines applied, reaching US$18 billion (based on half-million affected vehicles). Criminal investigations began as well. It also caused VW's share price to decrease. This situation has led to fines, compensations, lost in sales, and it also costs their reputation.
According to the professor, many VW engineers and executives must have known something was going on. I think it was totally unethical to have done something like this. When businesses go bad, people would always push the blame on the society. For example, saying "everybody is doing it too!" or "if we don't do it, someone else will" or " no one is getting hurt!"
I think VW was trying to cut costs because the car industry has high cost of capital, as stated by the presentation of Fiat Chrysler's CEO, Sergio Marchionne named "Confession of the capital junkie". In the presentation, Sergio Marchionne demonstrated that the car industry's cost of capital was too high. Furthermore, the returns of mainstream OEM (such as VW) were lower than their WACC. Therefore, I assume that this is the reason behind the skipping of emission test, which helps with reducing the overall cost.
This also makes me wonder.. Does that mean that the whole world doesn't have to be ethical anymore? VW has showed that unethical business can lose you respect, reputation and a huge sum of money. Hope it serves as a lesson to VW and other companies out there that business ethics are important and that every businesses in the world, no matter small or big, should be ethical. Without ethics, a company can never be successful. Do what is right, not what is easy.
Source:
Financial Times, 2015 http://www.ft.com/cms/s/2/32689e6c-6c3e-11e5-8171-ba1968cf791a.html?ftcamp=engage/capi/widget/client/openft/b2b#axzz45pGnf2lI
http://www.bbc.co.uk/news/business-34324772
Fiat Chrysler "Confession of capital junkie" http://www.fcagroup.com/en-US/investor_relations/events_presentations/quarterly_results_presentations/SM_Fire_investor_presentation.pdf
Friday, 22 April 2016
Thursday, 14 April 2016
Blog #7: Mercedes Goes to Motown (Documentary)
This week's blog post is going to be about the M&A of Daimler-Benz and Chrysler.
In November 1998, Daimler-Benz merger with Chrysler were probably the most famous of all international mergers then ended in failure. Daimler-Benz is one of Europe's largest automobile company. On the other hand, Chrysler was based on the US. At first, I thought the merger was a great idea. But no, there were so many problems. In the documentary, it shows obvious cultural differences as the main part of their problem. There were also different problem regarding their management- the different management thinking (closely relates to cultural differences) and other factors.
The merger deal was $56 billion for Chrysler to join the German Daimler Benz. Both Chrysler and Daimler saw the need to come together at first, but has now find it really difficult to remain competitive in this century as there are more and more competitors.
The companies also had different cultures. Daimler was quite a hierarchical company with a clear chain of command and respect for authority. Daimler Benz effectively operated as a holding company for a series of autonomous subsidiaries. Each subsidiary had their own management and structure. Though only one subsidiaries was profitable- Mercedes. While Chrysler was a more team-oriented one and also risk takers.
The manager chose its headquarter to be at Stuttgart rather than New York. Why would they do that? The share price fell after that. This had not been foreseen in negotiations. With further negotiations, their headquarters were not allowed in US and Germany. It was already a problem but there were more. They aren't making any profit- poor performance. Other than that, poor press were released with Detroit newspapers running anti German editorials. There were seemed to be poor handling case which were overlooked.
In year 2000, the company began to produce losses especially on Chrysler. They even had to reduce operations and also cut their number of employees. The merger wasn't even beneficial. Daimler Benz held the position of power from the start and made key strategic decisions with their own self-interest in mind. Then what "equal merger" meant to them? They also had no plans to power share with their American counterparts. Chrysler's workers even saw the deal as a takeover rather than a merger. I think there was an issue of trust because the employees on both sides felt reluctant to work with each other. I guess this is also the reason why they fell apart.
In my opinion, the cultural factor cannot be ignored on a global level, especially not within merger and acquisitions. Other than that, the merger of two companies cannot succeed without proper management. If they had good management, I guess things would turn out differently due to the synergies they could achieve from the M&A (such as revenue enhancement, higher bargaining power, lower costs and higher productivity).
In November 1998, Daimler-Benz merger with Chrysler were probably the most famous of all international mergers then ended in failure. Daimler-Benz is one of Europe's largest automobile company. On the other hand, Chrysler was based on the US. At first, I thought the merger was a great idea. But no, there were so many problems. In the documentary, it shows obvious cultural differences as the main part of their problem. There were also different problem regarding their management- the different management thinking (closely relates to cultural differences) and other factors.
The merger deal was $56 billion for Chrysler to join the German Daimler Benz. Both Chrysler and Daimler saw the need to come together at first, but has now find it really difficult to remain competitive in this century as there are more and more competitors.
The companies also had different cultures. Daimler was quite a hierarchical company with a clear chain of command and respect for authority. Daimler Benz effectively operated as a holding company for a series of autonomous subsidiaries. Each subsidiary had their own management and structure. Though only one subsidiaries was profitable- Mercedes. While Chrysler was a more team-oriented one and also risk takers.
The manager chose its headquarter to be at Stuttgart rather than New York. Why would they do that? The share price fell after that. This had not been foreseen in negotiations. With further negotiations, their headquarters were not allowed in US and Germany. It was already a problem but there were more. They aren't making any profit- poor performance. Other than that, poor press were released with Detroit newspapers running anti German editorials. There were seemed to be poor handling case which were overlooked.
In year 2000, the company began to produce losses especially on Chrysler. They even had to reduce operations and also cut their number of employees. The merger wasn't even beneficial. Daimler Benz held the position of power from the start and made key strategic decisions with their own self-interest in mind. Then what "equal merger" meant to them? They also had no plans to power share with their American counterparts. Chrysler's workers even saw the deal as a takeover rather than a merger. I think there was an issue of trust because the employees on both sides felt reluctant to work with each other. I guess this is also the reason why they fell apart.
In my opinion, the cultural factor cannot be ignored on a global level, especially not within merger and acquisitions. Other than that, the merger of two companies cannot succeed without proper management. If they had good management, I guess things would turn out differently due to the synergies they could achieve from the M&A (such as revenue enhancement, higher bargaining power, lower costs and higher productivity).
Saturday, 19 March 2016
Blog #6: Samsonite's decision to buy Tumi Inc. Good idea?
Merger and Acquisitions... A topic that I have never learned about before. This is one of the most important topic in my module. I find it quite interesting because I never knew such term like merger exists. So I did a little bit of research and found out that I have always came across companies that merges together (but never knew about it) to form a new company such as Pixar and Disney (some of my favourite movies are produced by them).
Without merger and acquisition, most of the well-known brands and companies would not be where they are today. Some of the companies are so successful til a point that we can't even remember a time when two were distinct. Where would Disney be without Pixar? Famous movies such as Cars, Toystory, The Incredibles may not even exist!! Oh now I thank God the merger happened.
However, merger and acquisition may not always be the case of success. There were also companies that merged together and ended up bankrupted. Wise decisions must always be made and it is also not an easy task. Sometimes, some companies are better off without another.
Recently I came across a news regarding Samsonite, an American luggage manufacturer and retailer, announced that it would acquire Tumi, a South Plainfield, New Jersey-based luggage manufacturer, in an all-cash transaction worth US$1.8 billion (Financial Times, 2016a). Of course Tumi's shareholders would get something out of the merger request. I didn't know that Samsonite approached Tumi last year but have failed to reach an agreement (Financial Times, 2016b). Well, turned out that Samsonite has gotten what they wanted. It can be seen that they really wanted Tumi to be a part of them.
According to Financial Times (2016a), Tumi's shareholders will receive $26.75 per share in an all-cash transaction, a 38% premium on the volume-weighted average price of the US company's stock up to March 2, before news of the deal broke, which, in my opinion, is quite a good deal. The price represents an enterprise value to the previous year's adjustment earnings before interest, tax, depreciation and amortisation multiple of 13.6 times. Aaron Fischer, the analyst at CLSA said that was above Samsonite's own EV/Ebitda of 11.7 times but it was considered reasonable considering the revenue-boosting opportunities and costs savings.
"Acquiring Tumi will help the Hong Kong-listed company re-balance its portfolio since it has focused more on producing mid-market products" (Financial Times, 2016a) and I think it would be great for them to expand their presence in this competitive market. According to the news, they segment their products on global business bags, travel luggage and accessories market. Samsonite has already expanding its presence in Asia. Therefore the brand is more popular in Asia than US and Europe.
The acquisition of Tumi would help to strengthen their business. Would it? From what I know, Tumi's net sales were $548 million and Samsonite's were $1.2 billion in year 2015 (Financial Times, 2016b). Tumi was considered one third of the size of Samsonite. Is the acquisition really a good idea? However there is also one good advantage of the acquisition, that is to expand the market further with the combination. Within the past weeks, Samsonite and Tumi's share prices were up, which shows good signs (Financial Times, 2016b). With such a huge news of their M&A, I don't think Samsonite's share prices would go up for long. However, it would probably help Tumi's share price to rise.
In my opinion, I think it is not a bad idea of their M&A. Samsonite wanted to expand their product to more market. Tumi is also considered a known brand to some countries. It would be easier for them to reach more of their target markets. I think it is not a bad idea because they could achieve synergies to save the cost of sourcing, distribution, retailing, administrative costs and so on. Also, to be more well known to more countries is one of the synergies that Samsonite can achieve.
Personally, I have never used Samsonite or Tumi's product, but would like to purchase one of their product someday. Though the price ranges were quite high, if the quality is worth the value then I would.
Sources:
Financial Times, 2016a http://www.ft.com/cms/s/0/7a5d1ff2-e198-11e5-8d9b-e88a2a889797.html#axzz45pGnf2lI
Without merger and acquisition, most of the well-known brands and companies would not be where they are today. Some of the companies are so successful til a point that we can't even remember a time when two were distinct. Where would Disney be without Pixar? Famous movies such as Cars, Toystory, The Incredibles may not even exist!! Oh now I thank God the merger happened.
However, merger and acquisition may not always be the case of success. There were also companies that merged together and ended up bankrupted. Wise decisions must always be made and it is also not an easy task. Sometimes, some companies are better off without another.
Recently I came across a news regarding Samsonite, an American luggage manufacturer and retailer, announced that it would acquire Tumi, a South Plainfield, New Jersey-based luggage manufacturer, in an all-cash transaction worth US$1.8 billion (Financial Times, 2016a). Of course Tumi's shareholders would get something out of the merger request. I didn't know that Samsonite approached Tumi last year but have failed to reach an agreement (Financial Times, 2016b). Well, turned out that Samsonite has gotten what they wanted. It can be seen that they really wanted Tumi to be a part of them.
According to Financial Times (2016a), Tumi's shareholders will receive $26.75 per share in an all-cash transaction, a 38% premium on the volume-weighted average price of the US company's stock up to March 2, before news of the deal broke, which, in my opinion, is quite a good deal. The price represents an enterprise value to the previous year's adjustment earnings before interest, tax, depreciation and amortisation multiple of 13.6 times. Aaron Fischer, the analyst at CLSA said that was above Samsonite's own EV/Ebitda of 11.7 times but it was considered reasonable considering the revenue-boosting opportunities and costs savings.
"Acquiring Tumi will help the Hong Kong-listed company re-balance its portfolio since it has focused more on producing mid-market products" (Financial Times, 2016a) and I think it would be great for them to expand their presence in this competitive market. According to the news, they segment their products on global business bags, travel luggage and accessories market. Samsonite has already expanding its presence in Asia. Therefore the brand is more popular in Asia than US and Europe.
The acquisition of Tumi would help to strengthen their business. Would it? From what I know, Tumi's net sales were $548 million and Samsonite's were $1.2 billion in year 2015 (Financial Times, 2016b). Tumi was considered one third of the size of Samsonite. Is the acquisition really a good idea? However there is also one good advantage of the acquisition, that is to expand the market further with the combination. Within the past weeks, Samsonite and Tumi's share prices were up, which shows good signs (Financial Times, 2016b). With such a huge news of their M&A, I don't think Samsonite's share prices would go up for long. However, it would probably help Tumi's share price to rise.
In my opinion, I think it is not a bad idea of their M&A. Samsonite wanted to expand their product to more market. Tumi is also considered a known brand to some countries. It would be easier for them to reach more of their target markets. I think it is not a bad idea because they could achieve synergies to save the cost of sourcing, distribution, retailing, administrative costs and so on. Also, to be more well known to more countries is one of the synergies that Samsonite can achieve.
Personally, I have never used Samsonite or Tumi's product, but would like to purchase one of their product someday. Though the price ranges were quite high, if the quality is worth the value then I would.
Sources:
Financial Times, 2016a http://www.ft.com/cms/s/0/7a5d1ff2-e198-11e5-8d9b-e88a2a889797.html#axzz45pGnf2lI
Financial Times, 2016b http://www.ft.com/fastft/2016/03/03/samsonite-shares-halted-amid-reports-of-tumi-takeover/?ftcamp=engage/capi/widget/client/openft/b2b
Saturday, 12 March 2016
Blog #5: The Company Men (drama), dealing with unemployment.
Today, I watched the movie, The Company Men, which lasted for about 2 hours. I found that movie quite interesting, mainly because of the handsome actor, Ben Affleck. Just kidding! I love the story line and it gives out an important message which I will state in the end of the blog post.
The drama is about a company named GTX, a multi-billion dollar shipbuilding company in Boston going down, due to the economic downturn. It starred three men (all three in different high levels of position in the company) and how they take their (unemployed) situation in their own ways, as affected by the economic downturn.
Bobby (Ben Affleck) lost his job and seemed to be too proud to give up his luxuries or to take up a lesser paying job. He refused to adapt to changes as he lost his six figure job. From the drama, I could see that he was eager to find a job after being unemployed. However, he did not want to adapt to changes to take on job which could not pay his required sum of salary. He seems like a very optimistic person because he thinks that he could find new work in no time.
As months go by, he finally accepted his situation (not easy to get a job) and had to change his lifestyle so much that he sold his Porsche and home to pay mortgages, bills and expenses. He then worked for his brother-in-law when he had no other way. Which I find quite impressive because he finally stopped caring about his 'rich image' and stepped out of his comfort zone to do something entirely different from his old job. It is always good to try something new, right? He became a carpenter, which he had to hammer nails and lift heavy tools. Even if he didn't have any experience in being a carpenter, he is still willing to learn. In my opinion, it is a type of courage that people should have, despite all the hardship he has been through. I also noticed that he learned to be grateful for the little things and started to pay more attention to his children.
Phil (Chris Cooper) is 60 years old and he had worked for GTX for 30 years. He started on the factory floor and got his way up to the current important position in the company, then, got fired. In this drama, he finds himself outmatched by younger candidates and had commit suicide after he realised that he couldn't get a job in that age. In my opinion, life always have a way. If he is willing to accept different kind of job with lower pays and cut down expenses, he would still be able to survive. He gave up too easily just because of a fall. What about borrowing money from friends and relative to support his bills? There is always solution to everything.
In terms of the company, is firing so many employees really worth it? It may look more favourable in the balance sheet (less wages & salaries) and might be able to help with the rise of share price. However, is there no other way to save the company? The one that surprised me was when Gene, the first employee of GTX and the best friend of the CEO (James Salinger) was also fired from the company.
There are some things that I have learned from the drama:
1. There is always a way if you can adapt to changes and to step out of the comfort zone.
2. Hardships will pass, courage lives on.
3. Unemployment can brings death by a thousand small cuts rather than one major one.
4. What an outplacement is. I never knew what an outplacement was until I watched the movie.
5. People should always have time for their families and not only be grateful when things happen.
6. James Salinger, the CEO of the company, said that "business is not charity". It hit me up. Yes, there is no guarantee to be secured in a job forever. We always have to be prepared for sudden situation like this (getting fired).
Link of the drama:
https://elp.northumbria.ac.uk/webapps/blackboard/content/listContent.jsp?course_id=_274611_1&content_id=_4038879_1
The drama is about a company named GTX, a multi-billion dollar shipbuilding company in Boston going down, due to the economic downturn. It starred three men (all three in different high levels of position in the company) and how they take their (unemployed) situation in their own ways, as affected by the economic downturn.
Bobby (Ben Affleck) lost his job and seemed to be too proud to give up his luxuries or to take up a lesser paying job. He refused to adapt to changes as he lost his six figure job. From the drama, I could see that he was eager to find a job after being unemployed. However, he did not want to adapt to changes to take on job which could not pay his required sum of salary. He seems like a very optimistic person because he thinks that he could find new work in no time.
As months go by, he finally accepted his situation (not easy to get a job) and had to change his lifestyle so much that he sold his Porsche and home to pay mortgages, bills and expenses. He then worked for his brother-in-law when he had no other way. Which I find quite impressive because he finally stopped caring about his 'rich image' and stepped out of his comfort zone to do something entirely different from his old job. It is always good to try something new, right? He became a carpenter, which he had to hammer nails and lift heavy tools. Even if he didn't have any experience in being a carpenter, he is still willing to learn. In my opinion, it is a type of courage that people should have, despite all the hardship he has been through. I also noticed that he learned to be grateful for the little things and started to pay more attention to his children.
Phil (Chris Cooper) is 60 years old and he had worked for GTX for 30 years. He started on the factory floor and got his way up to the current important position in the company, then, got fired. In this drama, he finds himself outmatched by younger candidates and had commit suicide after he realised that he couldn't get a job in that age. In my opinion, life always have a way. If he is willing to accept different kind of job with lower pays and cut down expenses, he would still be able to survive. He gave up too easily just because of a fall. What about borrowing money from friends and relative to support his bills? There is always solution to everything.
In terms of the company, is firing so many employees really worth it? It may look more favourable in the balance sheet (less wages & salaries) and might be able to help with the rise of share price. However, is there no other way to save the company? The one that surprised me was when Gene, the first employee of GTX and the best friend of the CEO (James Salinger) was also fired from the company.
There are some things that I have learned from the drama:
1. There is always a way if you can adapt to changes and to step out of the comfort zone.
2. Hardships will pass, courage lives on.
3. Unemployment can brings death by a thousand small cuts rather than one major one.
4. What an outplacement is. I never knew what an outplacement was until I watched the movie.
5. People should always have time for their families and not only be grateful when things happen.
6. James Salinger, the CEO of the company, said that "business is not charity". It hit me up. Yes, there is no guarantee to be secured in a job forever. We always have to be prepared for sudden situation like this (getting fired).
Link of the drama:
https://elp.northumbria.ac.uk/webapps/blackboard/content/listContent.jsp?course_id=_274611_1&content_id=_4038879_1
Saturday, 5 March 2016
Blog #4: BHP Billiton's dividend cut
Recently, it has been reported that BHP Billiton, an Anglo-Australian mining company, as well as the biggest mining company, had cut down its dividend, lowering the payout for the first time in 15 years (Bloomberg, 2016). According to Bloomberg, the company was trying to protect its balance sheet and credit ratings because of the huge decline on prices of commodities (see image below): the interim dividend was cut down from 62 cents to 16 cents and net loss was 5.67 billion dollars in the six months to 31st of December last year. Ambrose (2016) states that "the collapse of commodities prices and BHP's failed bet on the US shale industry drove its worst ever financial results". It was no wonder that the dividend was cut so much. In order to maintain payout, they would have to cut down dividend. Jac Nasser, the chairman of the company also claims that they did not made this changes lightly (FinancialTimes, 2016)
The BHP finance director said that "the world has become a lot less certain, there's high volatility, the macro outlook is more uncertain and in particular the oil outlook has changed. We didn't see the depths of the fall in oil prices quite honestly". One of the main reasons why their dividend was cut was because China had slowdown coupled with miners' investments. Another reason is that the oil price was also falling. According to Financial Times (2016), BHP did not foreseen oil price slipping below $30 a barrel.
It is not surprising to see that their share price in Australia dropped for over 40% over the past 12 months.Even the standard & Poor's cut its rating from A+ to A. According to Financial Times (2016), the rating would be downgraded even further depending on the announced dividend policy. This can be seen as a threat to the company.
In my opinion, this kind of news is always very unpredictable, such as the decline in price of oil and commodities. We wouldn't know when will they rise, or when will they decline even further again. In a way, I think it is a wise choice that BHP cut its dividend in order to save its balance sheet Without optimal earnings, BHP is going to damage its balance sheet. I believe that by cutting off dividends, it might be able to prevent the downgrading of their credit ratings. Which can also be a good thing. One way BHP can do to get back up is to restructure there capital structure in order to reduce the amount of gearing. This news has taught me that even though a company had good capital structure, in a few years time, it may not be as good as it was. Companies do have to constantly readjust their capital structure in order to maximize shareholder's wealth.
Sources:
Bloomberg, 2016 http://www.bloomberg.com/news/articles/2016-02-22/bhp-cuts-dividend-as-first-half-profits-fall-92-on-price-rout
http://www.ft.com/fastft/2016/02/22/bhp-billiton-slashes-dividend-as-profits-slide/?ftcamp=engage/capi/widget/client/openft/b2b
 |
| Source: Financial Times (2016) |
The BHP finance director said that "the world has become a lot less certain, there's high volatility, the macro outlook is more uncertain and in particular the oil outlook has changed. We didn't see the depths of the fall in oil prices quite honestly". One of the main reasons why their dividend was cut was because China had slowdown coupled with miners' investments. Another reason is that the oil price was also falling. According to Financial Times (2016), BHP did not foreseen oil price slipping below $30 a barrel.
It is not surprising to see that their share price in Australia dropped for over 40% over the past 12 months.Even the standard & Poor's cut its rating from A+ to A. According to Financial Times (2016), the rating would be downgraded even further depending on the announced dividend policy. This can be seen as a threat to the company.
In my opinion, this kind of news is always very unpredictable, such as the decline in price of oil and commodities. We wouldn't know when will they rise, or when will they decline even further again. In a way, I think it is a wise choice that BHP cut its dividend in order to save its balance sheet Without optimal earnings, BHP is going to damage its balance sheet. I believe that by cutting off dividends, it might be able to prevent the downgrading of their credit ratings. Which can also be a good thing. One way BHP can do to get back up is to restructure there capital structure in order to reduce the amount of gearing. This news has taught me that even though a company had good capital structure, in a few years time, it may not be as good as it was. Companies do have to constantly readjust their capital structure in order to maximize shareholder's wealth.
Sources:
Bloomberg, 2016 http://www.bloomberg.com/news/articles/2016-02-22/bhp-cuts-dividend-as-first-half-profits-fall-92-on-price-rout
http://www.ft.com/fastft/2016/02/22/bhp-billiton-slashes-dividend-as-profits-slide/?ftcamp=engage/capi/widget/client/openft/b2b
Friday, 26 February 2016
blog #3: Deutsche Bank's issue on its capital structure.
In this week's lecture and seminar, I learned about the capital structure theory, and mainly about the Weighed Average Cost of Capital (WACC). So it is related to the previous week's lessons about cost of capital. I have learned about WACC back in high school but I definitely have learnt more about it in this week's classes. Other than that, I also have learnt about the theories of capital structure such as the trade-off models and pecking order models, debts and equity, how debts have lower risk than equity and so on.
In the recent news, I have found out that Deutsche Bank (German Bank) has more debts than equity. According to YCharts (2015), the debt to equity ratio was 3.00, as of 31st of December, 2015. Deutsche Bank's debt to equity ratios have always been high. It automatically means the bank have been taking high risks. It also implicated that by 31st of December 2015, Deutsche Bank held debts of three times more claim on assets than equity holders. Deutsche Bank had unhealthy capital structure because they have high level of debts and low level of equity. They really have negative signs of investment quality. If I were an investor, I don't think I would invest in Deutsche Bank.
According to NotQuant (2016), as of April 2014, Deutsche Bank was forced to raise an additional 1.5 billion of Tier 1 capital to support its capital structure. In May 2014, Deutsche Bank announced that they were selling stocks that worth 8 billion euros, which was up to 30% discount of the price. It truly shocked the media. I am thinking they were trying to raise liquidity. In March 2015, Deutsche Bank has failed the banking industry's "stress test" and is given warning on its capital structure. It is as expected because their debt to equity level has never been low, which really is disappointing to know.
Early this year, according to Financial Times (2016), Deutsche Bank's bond fell further and the 1.75 billion euro bond is trading below 76 cents on euro (see image below). Also, the 1.5 billion bond fell to 81.5 cents on the dollar. It wasn't a good start of the year for Deutsche Bank. The losses made their capital structure look even worse. The bank's CoCo bond of 1.75 billion had lost about 19% of its value (Financial Times, 2016). It was really bad news. This can result in investors not getting paid on their coupon payments. According to Bloomberg (2016), the investors were also worried that the capital and funds can decrease the value of its stock and bond even further.
Even their Returns on Invested Capital (ROIC) is lower than their Weighted Average Cost of Capital (WACC). The amount of Deutsche Bank's WACC and ROIC can be seen from Guru Focus (image below). It demonstrates that the WACC was 5% in average during last year and the ROIC was mostly negative in the past year. This shows rather bad sign and calls for a need to readjust their capital structure, to find the "optimum" amount of WACC in order to maximize wealth of shareholders. Companies should focus on lowering their WACC as low as possible to get higher returns.
Deutsche Bank's Ratios
Can Deutsche Bank repay their debts (by having such low ROIC and high WACC) and make adjustments on their capital structure? This is one serious issue for investors and for the bank itself. In my opinion, I think they could, but not for long. There is still help for Deutsche Bank if they could come up with an action to the existing issue, such as, choosing or finding the optimal financing mix/ capital structure. I think they have incurred too much debt which leads to risks of bankruptcy.
There has always been a debate on whether optimal capital structure exists (M&M theory vs traditional theory). I respect both of the points but honestly, I think it does exist and it is quite logical to have not too much gearing (because the company can suffer from all the costs like bankruptcy costs, agency costs and taxes) BUT also not to have too little gearing (as it can decrease the WACC). Anyway, I also think capital structure matters to EVERY companies, big and small.
In the recent news, I have found out that Deutsche Bank (German Bank) has more debts than equity. According to YCharts (2015), the debt to equity ratio was 3.00, as of 31st of December, 2015. Deutsche Bank's debt to equity ratios have always been high. It automatically means the bank have been taking high risks. It also implicated that by 31st of December 2015, Deutsche Bank held debts of three times more claim on assets than equity holders. Deutsche Bank had unhealthy capital structure because they have high level of debts and low level of equity. They really have negative signs of investment quality. If I were an investor, I don't think I would invest in Deutsche Bank.
According to NotQuant (2016), as of April 2014, Deutsche Bank was forced to raise an additional 1.5 billion of Tier 1 capital to support its capital structure. In May 2014, Deutsche Bank announced that they were selling stocks that worth 8 billion euros, which was up to 30% discount of the price. It truly shocked the media. I am thinking they were trying to raise liquidity. In March 2015, Deutsche Bank has failed the banking industry's "stress test" and is given warning on its capital structure. It is as expected because their debt to equity level has never been low, which really is disappointing to know.
Early this year, according to Financial Times (2016), Deutsche Bank's bond fell further and the 1.75 billion euro bond is trading below 76 cents on euro (see image below). Also, the 1.5 billion bond fell to 81.5 cents on the dollar. It wasn't a good start of the year for Deutsche Bank. The losses made their capital structure look even worse. The bank's CoCo bond of 1.75 billion had lost about 19% of its value (Financial Times, 2016). It was really bad news. This can result in investors not getting paid on their coupon payments. According to Bloomberg (2016), the investors were also worried that the capital and funds can decrease the value of its stock and bond even further.
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| Image source: Financial Times( 2016b) |
Even their Returns on Invested Capital (ROIC) is lower than their Weighted Average Cost of Capital (WACC). The amount of Deutsche Bank's WACC and ROIC can be seen from Guru Focus (image below). It demonstrates that the WACC was 5% in average during last year and the ROIC was mostly negative in the past year. This shows rather bad sign and calls for a need to readjust their capital structure, to find the "optimum" amount of WACC in order to maximize wealth of shareholders. Companies should focus on lowering their WACC as low as possible to get higher returns.
Deutsche Bank's Ratios
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| Image source: Focus Guru |
Can Deutsche Bank repay their debts (by having such low ROIC and high WACC) and make adjustments on their capital structure? This is one serious issue for investors and for the bank itself. In my opinion, I think they could, but not for long. There is still help for Deutsche Bank if they could come up with an action to the existing issue, such as, choosing or finding the optimal financing mix/ capital structure. I think they have incurred too much debt which leads to risks of bankruptcy.
There has always been a debate on whether optimal capital structure exists (M&M theory vs traditional theory). I respect both of the points but honestly, I think it does exist and it is quite logical to have not too much gearing (because the company can suffer from all the costs like bankruptcy costs, agency costs and taxes) BUT also not to have too little gearing (as it can decrease the WACC). Anyway, I also think capital structure matters to EVERY companies, big and small.
References:
YCharts, 2015 https://ycharts.com/companies/DB/debt_equity_ratio
Bloomberg, 2016 http://www.bloomberg.com/news/articles/2016-02-08/deutsche-bank-says-it-has-at1-payment-capacity-of-1-1-billion
Financial Times, 2016a http://www.ft.com/fastft/2016/02/08/deutsche-coco-bonds-plumbing-new-lows/?ftcamp=engage/capi/widget/client/openft/b2b
Financial Times, 2016b http://ftalphaville.ft.com/2016/02/09/2152719/the-coco-that-popped/?ftcamp=engage/capi/widget/client/openft/b2b
NotQuant, 2016 http://notquant.com/is-deutsche-bank-the-next-lehman/
http://www.gurufocus.com/financials/DB
Friday, 19 February 2016
Blog #2: The last days of Lehman Brothers (Documentary)
Today, I am going to blog about the Lehman Brothers, a global financial service firm, which unfortunately has declared its bankruptcy on September 15th, 2008 due to subprime crisis. Although 7 years have passed, it is still an issue that is talked about. I remember back when I was at high school in year 2008, the news was talking about the Lehman Brothers for a period of time, mostly in TV and newspapers. I was still a teenager and wasn't interested with such news, though I kept hearing about it from my family and relatives. It was such a big news that it was difficult to ignore.
Since I have heard about the Lehman Brothers, there is a bit of acknowledgement. This is why I chose to blog about it. I have watched the documentary on Lehman brothers, namely The Last Days of Lehman Brothers. The drama was inspired by the real events that occurred leading to the bankruptcy of Lehman Brothers. They were in trouble after six months of turbulence in which their real estate investments have lost billions of dollars, causing a huge drop in their stock. I have also found out that Merrill Lynch was also having the same trouble. Fortunately, they have avoided the situation with luck. Even Barclays and Bank of America backed off from purchasing Lehman Brothers as they are fully loaded with toxic assets. In the end, Lehman Brothers has not been saved.
I have noticed two reasons that have led to Lehman Brother's bankruptcy.
Firstly, they did not take the situation seriously. Dick Fuld, the boss of Lehman Brothers kept repeating that 'the situation is not critical' when their stock has gone down. How can it not be taken seriously? Or is he trying to perceive that his company can manage to get away from critical situation like this? It is a fact that Lehman Brothers used to be the fourth biggest investment bank in the U.S. But in my honest opinion, if a situation like this was not taken seriously, it can lead to serious trouble for the company, such as, in this case, bankruptcy. Other than Dick Fuld, the management groups were also responsible for the fall. As they were too optimistic about the whole situation. In my opinion, one of the biggest mistakes that they have made was that they believed that Lehman Brothers was too big to even go bankrupt. Personally, I do not agree with this thinking. In the clip, Dick Fuld keeps repeating on the statement on who would want his company. I feel that he have always been desperate and thinking too positive towards everything.
Secondly, there was no good risk management in the company and got criticized for it. Dick Fuld has denied that and said "regardless of what you heard of Lehman Brothers' risk management, I had 27,000 risk managers, because they all owned a piece of the firm" explaining that the staffs had owned more then 30% of the bank's stock (The Guardian, 2015). According to Hutchinson (2008), in the annual report of Lehman Brothers in year 2008, they stated that they had a culture of risk management at every level of the firm. But, if there was a culture of risk management, why would they allow the leverage ratio to rise from 26.2:1 to 30.7:1 from year 2006-2007? This is the question. I think they could have done it better managing their strategic risk a little bit better. According to McConnell (2012), strategic risk is one of the greatest risk facing of all firms because of the uncertainties in the global economy. It should really be taken more seriously to avoid such problem.
I send my heartfelt regards to the 27,000 employees that had lost their jobs from the bankruptcy of Lehman Brothers. I have learned to not take things lightly, even if they won't be as serious as I thought. It is because everything is unpredictable and we have to make sure that we try our best to leave no regrets. In the future, if I were to own a business or become a manager at any level, I have to be a good example or a role model to the staffs. Dick Fuld has definitely taught me some lessons.
Links:
http://www.theguardian.com/business/2015/may/28/lehman-brothers-former-ceo-blames-bad-regulations-for-banks-collapse
http://moneymorning.com/2008/09/12/lehman-brothers-holdings/
http://www.capco.com/uploads/articlefiles/308/file_0_1420620061.pdf
Since I have heard about the Lehman Brothers, there is a bit of acknowledgement. This is why I chose to blog about it. I have watched the documentary on Lehman brothers, namely The Last Days of Lehman Brothers. The drama was inspired by the real events that occurred leading to the bankruptcy of Lehman Brothers. They were in trouble after six months of turbulence in which their real estate investments have lost billions of dollars, causing a huge drop in their stock. I have also found out that Merrill Lynch was also having the same trouble. Fortunately, they have avoided the situation with luck. Even Barclays and Bank of America backed off from purchasing Lehman Brothers as they are fully loaded with toxic assets. In the end, Lehman Brothers has not been saved.
I have noticed two reasons that have led to Lehman Brother's bankruptcy.
Firstly, they did not take the situation seriously. Dick Fuld, the boss of Lehman Brothers kept repeating that 'the situation is not critical' when their stock has gone down. How can it not be taken seriously? Or is he trying to perceive that his company can manage to get away from critical situation like this? It is a fact that Lehman Brothers used to be the fourth biggest investment bank in the U.S. But in my honest opinion, if a situation like this was not taken seriously, it can lead to serious trouble for the company, such as, in this case, bankruptcy. Other than Dick Fuld, the management groups were also responsible for the fall. As they were too optimistic about the whole situation. In my opinion, one of the biggest mistakes that they have made was that they believed that Lehman Brothers was too big to even go bankrupt. Personally, I do not agree with this thinking. In the clip, Dick Fuld keeps repeating on the statement on who would want his company. I feel that he have always been desperate and thinking too positive towards everything.
Secondly, there was no good risk management in the company and got criticized for it. Dick Fuld has denied that and said "regardless of what you heard of Lehman Brothers' risk management, I had 27,000 risk managers, because they all owned a piece of the firm" explaining that the staffs had owned more then 30% of the bank's stock (The Guardian, 2015). According to Hutchinson (2008), in the annual report of Lehman Brothers in year 2008, they stated that they had a culture of risk management at every level of the firm. But, if there was a culture of risk management, why would they allow the leverage ratio to rise from 26.2:1 to 30.7:1 from year 2006-2007? This is the question. I think they could have done it better managing their strategic risk a little bit better. According to McConnell (2012), strategic risk is one of the greatest risk facing of all firms because of the uncertainties in the global economy. It should really be taken more seriously to avoid such problem.
I send my heartfelt regards to the 27,000 employees that had lost their jobs from the bankruptcy of Lehman Brothers. I have learned to not take things lightly, even if they won't be as serious as I thought. It is because everything is unpredictable and we have to make sure that we try our best to leave no regrets. In the future, if I were to own a business or become a manager at any level, I have to be a good example or a role model to the staffs. Dick Fuld has definitely taught me some lessons.
Links:
http://www.theguardian.com/business/2015/may/28/lehman-brothers-former-ceo-blames-bad-regulations-for-banks-collapse
http://moneymorning.com/2008/09/12/lehman-brothers-holdings/
http://www.capco.com/uploads/articlefiles/308/file_0_1420620061.pdf
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