Ramblings about Corporate Finance

I have a keen interest in M&A because of the strategic importance they have for a company and the transformational impact they can have on markets. It is arguably the biggest decision a manager has to make in their career; who to acquire, for what price and how to integrate to create a synergistic organisation are all key considerations. That is assuming the manager has shareholder wealth maximisation as their goal. As eluded to in the RBS blog a few weeks ago, agency and hubris motives for acquisitions often play an instrumental role in destroying shareholder wealth. It is this interest in M&As which I hope will spur me on when I am reading my 85th journal article on the shareholder wealth effects of M&A decisions during my dissertation research. For this weeks blog I will be discussing M&A integration and my experiences on placement and at my part time job. Lloyds Banking Group Before I talk through the difficulty in integrating IT systems, I have reflected upo

This week I will be reflecting on my learning of the Madoff Hustle documentary, which provides details of the world’s largest Ponzi scheme, totalling $65B, perpetrated by Bernard Madoff which was uncovered during the financial crisis. What is a Ponzi Scheme? It was in second year of University when I first heard of Ponzi schemes. Mark Lochanan’s regulation and financial crime seminars were very interesting and they provided a detailed insight into some of the suspicious behaviours which characterise these financial scams. For those of you who did not have the pleasure of being a part of Mark’s seminars, I will provide my interpretation of a Ponzi scheme. They start with an individual or group who claim to have a new or exclusive investment strategy which guarantees high returns. The first set of investors will be chosen for their high net-worth and lack of investment knowledge. This lack of investment knowledge is coupled with a ‘club’ or exclusive feeling, meaning people are o

Prior to watching the documentary ‘Inside Job: Storyville’ I thought I was quite informed about the general factors which contributed towards the financial crisis. Upon watching the documentary, however, I have enhanced my understanding considerably because it was from a US perspective.  The Growth of Financial Services Let’s go back three decades, when financial services companies were simpler. Investment banks were small partnerships. It was the partners’ money at risk, so it was in their best interests to make prudent investment decisions. Retail banks were localised, with deposits being loaned out into the communities in which they operated. The segregation of retail and investment bank activities protected consumers from major losses. Then deregulation came along. Investment banks listed on the stock market, providing them with  an abundance of other people’s money – creating a heads we win, tails you lose situation. The lines became blurred between retail and inv

Dividends 101 Prior to this week's lecture, I assumed shareholders would prefer to have dividends than not. As the owners of the company, they would expect idle cash to be returned, in order to ensure capital is allocated efficiently. As the lecture progressed, there was a thought-provoking question posed; would shareholders prefer dividends or the company to invest in positive NPV projects. My thoughts here were different to before, such that I expected companies to invest in all positive NPV projects available in order to maximize the future earnings potential.  My initial thoughts aligned to the 'Dividend irrelevance theory'. This theory was created by Modigliani and Miller in 1961 and it stated that share prices are determined by investment decisions. Investing in all positive NPV projects should be the only consideration when looking to maximise the company value. This indicates that dividends are the residual cash after investing in these projects. Because of

Leverage – A double edged sword My upbringing has always taught me to live within my means and that debt is inherently bad because of the drastic consequences its mismanagement can have. This is of little surprise having been brought up during the worst Financial Crisis, and subsequent recession, for almost a century. However, throughout University and my placement year, this notion has subsided somewhat. I now recognise debt’s importance; at an individual’s level, the access to credit plays a huge role in prosperity, whether that’s to fund a mortgage or to become an entrepreneur or for other things. Therefore, I am now of the opinion that debt with  responsible individuals  in the  right quantities  can be beneficial for those individuals and society as a whole.  In looking at debt from a corporate perspective, it can be beneficial because it is often cheaper than equity financing. However, it is also riskier because of the legal obligation to repay interest, irrespective of f