Finance Peer Responses/Reflection #6
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peer_responses.docx· Choose and Respond to 3 posts listed below. Advance the conversation; provide a real-world application and experiential examples;
· Conceptually discuss your key [most significant] learning insight or take-away from the selected forum topic comments.
· Responses should be a minimum of 150-250 words , supported by at least one reference outside of the textbook (use academic journals), either supporting or refuting the position of the author of the forum topic response or peer response.
Topic #1 Cash Management
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Introduction
Cash is an indispensable part of the business. In fact, it the living cell which gives life to the business. It is required for numerous functions like purchasing raw material, paying expenses, paying debts, paying dividends and more. Thus it becomes very crucial to manage cash properly so that business can sustain and grow well. In order to so, it is necessary to have requisite skills in the manager.
Cash Management
Before understanding the concept of cash management, it is essential to know that what exactly cash means. In general, “Cash may be in any form of currency, like banknotes and coins, which have a legal acceptance and recognition in the market” (Akrani, 2012). In business, cash represents the balance of cash available with the business at particular point of time. “The concept of cash management covers collection, concentration and disbursement of cash. Cash management is a set of strategies or techniques a company uses to collect, track and invest money” (Tatum, 2015). The main purpose of this concept is to maximize the availability of cash required by the business and utilizing it in a best way so that risk of insolvency can be avoided.
Reasons to Hold Cash
Generally there are three reasons for holding cash; they are for transaction purpose, precautionary measure and speculative motives. Transaction purpose includes collection and disbursement of cash. Collection can be through sale, sale of fixed assets and more Disbursement of cash means outflow of cash such as payment of salaries, interest etc. It is often seen that every manager tries to realize the cash quickly and likes to pay cash as slow as possible. “If at any time a company fails to pay an obligation when it is due because of the lack of cash, the company is insolvent” (Inc., n. d.).
“In tough times, such as the recession of 2008-09, banks may tighten up the revolving credit or short-term loans that businesses often rely on to sort out cash management troubles” (Inc., n. d.) Thus, every organization should take precautionary measures. Precautionary measures means to keep certain amount of cash in order to meet emergency. Business has to face number of fluctuations in its life. Thus, in order to tackle the fluctuations, it is essential to carry certain amount of cash. For instance, the machinery which is used in production gets destroyed due to fire. In this case, it is necessary to buy machinery in a proper time so that production can be started. Here emerges the need of cash. The amount of cash to be maintained differs from organization to organization and is generally decided by evaluating past experiences and present circumstances. For this, management often uses different ratios like current ratio, liquidity ratio and more to decide the optimal cash balance.
Third, speculative motives; it means to hold sufficient amount of cash so that advantage of unexpected opportunity can be taken. For instance, a leather shoe manufacturer got offer to manufacture leather wallets at a very high profit margin. In this case, if sufficient cash is there in organizations then he can accept the offer and can enjoy profits.
Techniques of Cash Management
In order to manage cash, different businessmen use different techniques. Some of the popular techniques are discussed as under:
Budgeting: It means to prepare a plan which shows your cash spending. It is a technique which acts as a planning and controlling tool for the cash expenditures. By using this technique, managers prepare a cash budget for 1-2 month in order to know the flow of cash. It is a kind of short term financial planning which shows the picture of cash flows (inflows and outflows) in the organization. “By preparing a budget, there's a good chance you will free up extra cash to use for other purposes, like investing” (Joseph, n. d.).
Effective use of Credit Line: Credit line represents the amount lent by creditors to a business. It is very hard technique of cash management. It means to pay the creditors in a proper time so that their trust can be gained and further they can increase the credit limit. With the help of this technique, a business can convince other lenders as well (if required).
Investing: It means to invest extra cash held by the organization or a person. There are number of ways where one can invest its amount. In fact, one can also get choice of time for investing the funds. For instance, a person wants to invest $5000 for a month then he can lend his money to other or can deposit in bank or can invest into the share market and more.
Check on Account Receivables & Expenses: “The accounts receivable refers to all the money coming into the business that can come from sales or returned investments” (Fritsky, 2015). It is equally essential to track all the essential dates such as date of borrowing and payment. Apart from this, an organization keeps watch on expenses incurred.
Preparation of Cash Flow Statement: Cash flow statement shows the outflows and inflows of cash. With the help of this statement, one can know changes in cash and can control it. The statement shows changes in cash through three activities; they are operating, investing and financing. Operating cash flow shows changes in cash due to activities related to operations of the business. Investment cash flow shows changes in cash due to all the non-operating activities such as sale of fixed assets etc. Financing cash flow shows changes in cash due to external factors or parties like repayment of loan, issuance of stock and more.
Conclusion
It is true that poor cash management can take gigantic form and can become a cause for business failure as well. Thus every organization irrespective of its size, nature and type must use the techniques of cash management. Cash management techniques, especially for businesses, generally revolve around having a bigger positive cash flow to ensure profit (Fritsky, 2015).
References:
Akrani, G. (2012, February 23). What is cash? Kalyan City Life. Retrieved from
http://kalyan-city.blogspot.com/2012/02/what-is-cash-meaning-definition.html
Fritsky, L. (2015, January 5). What are the basic cash management techniques? Wise Geek. Retrieved from
http://www.wisegeek.com/what-are-basic-cash-management-techniques.htm
Inc. (n. d.). Cash management. Retrieved from
http://www.inc.com/guides/finance/cashmanagement.html
Joseph, C. (n. d.). Various cash management techniques. Retrieved from
http://budgeting.thenest.com/various-cash-management-techniques-3956.html
Tatum, M. (2015, January 25). What is cash management? Wise Geek. Retrieved from
http://www.wisegeek.org/what-is-cash-management.htm
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Topic #2: Reasons for Holding Cash
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In recent years there has been an increase in the amount of cash that companies are holding onto. In 2013, United States non-financial companies held an astonishing $1.64 trillion in cash at the end of the year (Lane & Jankowitz, 2014). This number was up by 12% from the previous year in which companies held $1.46 trillion dollars (Lane & Jankowitz, 2014). The section of businesses attributed to the majority of cash being held is the technology sector. Companies such as Apple, Microsoft, Google and Verizon are among the richest, holding the most cash of any other businesses (Lane & Jankowitz, 2014). But it seems counterintuitive to hold onto cash from what we have learned so far. With all of the investment opportunities available why would a company hold on to such large sums of cash? The answer to this will be discussed in the section below containing the four main reasons companies choose to hold on to cash.
Speculative Motive
Holding onto cash can mean that companies have money available to invest should a good deal come about. Companies who hold onto cash for this reason are using the speculative motive. Some of the business deals that could come up include bargain purchases, attractive interest rates, and favorable exchange rate fluctuations (Ross & Westerfield & Jaffe, 2013). Take, for example, a fencing company that requires raw goods such as wood, nails and hammers. If the company is expecting in the near future that wood is going to be offered at a significantly lower price, then it would make sense to set aside cash to buy materials at the lower price. Another company who suspects that interest rates are going to increase may decide to purchase securities from the reserved cash (Sharma, n.d.). These are only a few examples of why a company would hold cash in the speculative motive, however the reasons a countless.
Precautionary Motive
A second reason why companies choose to hold onto cash is to have money on hand in case of unexpected costs. This is called the precautionary motive. The cash functions essentially as an emergency fund. If we revisit the example above with the fencing company we can see how holding cash for a precautionary motive can be applied. If the price of wood and nails dramatically increases and the fencing company does not have enough raw materials in storage to complete their tasks then they would be required to purchase raw materials at this higher cost. This cost above and beyond the normal cost of raw materials could not have been predicted and therefore it was not in the budget. This is where the cash in holding is useful. Without the cash the company would not be able to purchase the necessary raw materials and would lose out on profit from sales. Exercising precautionary motives can be very beneficial to a company in unforeseen circumstances.
The Transaction Motive
However, a third motive exists that entices companies to hold on to cash. Each company on a day-to-day basis has transactions requiring money going out as well as money coming in. Some of these transactions include salaries, wages, taxes, interest, and dividends (Sharma, n.d.). However, on a given day the amount of money coming in and the amount of money going out may not match up exactly. In this instance cash holding can be used as a buffer to make payments until the money coming in catches up to the money going out. For example, if the fencing company has low sales for a day but the amount of wages being paid out remains constant then the company will need cash on hand to satisfy the wages since the money earned from sales would not be enough. Cash on hand allows the company to have a little wiggle room for the fluctuations in daily transactions.
Compensating Balances
The last reason for holding cash is to compensate banks for the services they provide to a business. Banks are involved in a lot of transactions with businesses such as clearing checks, supplying credit information and transferring funds to name a few (Khan & Jain, 2015). Some banks will charge a fee for these transactions, however others may simply request that a company keep a certain amount of money in their account as compensation. By requiring a company to keep a balance in their account that cannot be used for transactions, banks can use the money to earn a return for themselves. This is used as a form of indirect payment for the services the bank provides the business. If we visit the fencing company one last time we can see how compensating balances would be a good reason for them to hold onto cash. If the fencing company uses the bank to take care of checks received from clients, the bank may charge a fee for each check cleared or they may offer to do all of the company’s checks for no fee as long as the fencing company agrees to have a certain amount of money in an account. The compensating balances account may prove to be more beneficial to the company so that they do not incur charges for every check that comes in.
As we can now see there are many reasons why a company such as Apple or Google would choose to hold on to billions of dollars. Even though this money could be used to invest and earn money elsewhere, it is important to have cash on hand. Whether the cash is saved in speculation that a deal may come about in the near future or in a precautionary manner in case of emergency, it is now clear why companies are holding on to such large sums of money. In the end, a company can save a lot of money in costs if they have even a little bit of cash tucked away to take advantage of deals, compensate banks for their work or be available for unexpected costs. The $1.64 trillion that the top companies in the United States is holding does not simply sit without expectation but is accessible for whatever may come up.
Reference
Khan, M. Y, & P. Jain. (2015).Financial management : text, problems and cases New Delhi, Tata McGraw-Hill.
Lane, R. & Jankowitz, R. (31 Mar. 2014). In Moody’s: US non-financial corporates’ cash pile grows, led by technology. Retrieved Feb. 9, 2015 from https://www.moodys.com/research/Moodys-US-non-financial-corporates-cash-pile-grows-led-by--PR_296106
Ross, S. A. and Westerfield, R. W. and Jaffe, J. (2013). Corporate finance. New York, NY: McGraw-Hill/Irwin.
Sharma, R. (n.d.). In Holding Cash – Motives of a Company. Retrieved Feb. 9, 2015 from http://www.careerride.com/fa-cash-holding-motives.aspx
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Topic #3: Financial Distress and Financial Distress Costs
When a business or organization is doing we they usually continue to move forward and expand, but let us look at what could happen if this said company was no longer doing well and started to fall into financial distress. To begin what is financial distress and how does it affect the business or organization as a whole? Well financial distress can be explained very simply, it is when a business or organization becomes stretched for money and can no longer pay their financial obligations on time (Financial distress, 2015).
Now there are many ways that financial distress can affect a business or organization. First off if the situation continues for an extended amount of time then the business or organization could be forced to either file bankruptcy or they may have to liquidate themselves (Financial distress, 2015). The reason this first scenario occurs is because once a business falls into financial distress most banks and other financial establishments no longer allow these businesses or organizations borrow money (Financial distress, 2015). Other things that can occur to a business or organization from financial distress are that their market value may decrease rapidly, their supplier may no longer take the business’ or organization’s word and will want COD terms, or big customer orders may fall through because they fear their orders will not be fulfilled on time (Financial distress, 2015).
Besides all the things that can occur to a business or organization from financial distress there is another thing that has to be considered as well as what can occur from financial distress and that is the costs of this financial distress. Financial distress costs can be the result of the business or organization borrowing larger amounts of money while not producing as much products as before (Financial distress costs, 2015). These businesses or organization can also have a greater opportunity cost versus that of their lost income which can result in financial distress costs (Financial distress costs, 2015). However, even with all of these things that can result in financial distress costs these businesses or organizations do have a few options in order to attempt to save themselves before they lose everything and that is just a straight out liquidation or a restructuralization of the business or organization both of which can also cause there to be a financial distress costs for the business or organization (Financial distress costs, 2015).
The best thing for a business or organization to do in this situation if they do not want to liquidate is to attempt a restructuralization of themselves. Now to do this there are many things that the business or organization can do, but for our business or organization well will look at a five step method to restructuralization of themselves.
· Step One
The first step to restructuralizing a business or organization is to bring some extra help in (Kroll, 2015). Many CFOs at mid-sized to large businesses often become overwhelmed during the rough times within a business (Kroll, 2015). An outside specialist can have the time to focus and better prepare the needed information to work with these very stressed out CFOs to help them better their businesses or organizations (Kroll, 2015).
· Step Two
The second step to restructuralizing a business or organization is to catch your problems early (Kroll, 2015). Basically do not wait to bring in help when it is too late to do anything else (Kroll, 2015). Also it can be very challenging to find alternative financing for the business or organization (Kroll, 2015).
· Step Three
The third step to restructuralizing a business or organization is to make sure the business or organization is communicating with their bank or financial establishment (Kroll, 2015). If a business or organization does not communicate with these establishments then they begin to think the worst it is better to have everyone on the same page then letting a good financial relationship go south (Kroll, 2015).
· Step Four
The fourth step to restructuralizing a business or organization is to forecast their cash (Kroll, 2015). This is usually the step that is generally skipped when restructuralizing a business or organization and is necessary to know whether the business or organization is consuming too much cash or making more cash (Kroll, 2015). Now if the business or organization is consuming too much cash they can at least try to lessen the rate in which the cash is being consumed (Kroll, 2015). By forecasting the cash of a business or organization they will be less likely to be surprised by either an overdraft or having any other problem that could arise (Kroll, 2015).
· Step Five
The last step to restructuralizing a business or organization is to fight the desire to sue your financial establishment (Kroll, 2015). What I mean by this is say the business or organization receives a notice of default and they decide to hire an attorney this can make the situation hard and very messy (Kroll, 2015). It makes all the parties involved very tense and hostile when all that was need was communication between all the parties involved (Kroll, 2015). Now days many financial establishments are will to negotiate terms of agreement between all parties before resorting to lawyers and such it just take everyone talking to one another (Kroll, 2015).
Now that we know what these five step to restructuralizing a business or organization are I feel that if they have the desire to fight for themselves then they are better prepared to do so.
In conclusion, we now know that financial distress is when a business or organization becomes stretched for money and can no longer pay their financial obligations on time. We also know that there are many ways that financial distress can affect a business or organization. Lastly, even though a business or organization is dealing with financial distress there are also costs that can be associated with this financial distress. This is especially true if the business or organization intends to restructurlize themselves. With all of this new information we can see that even when a business or organization is undergoing financial distress there are other aspects that they have to keep in mind and these are usually “Do we want to continue being this business” or “Is there a reason fight to keep our business alive” many business owners and managers have had to ask themselves these question or similar ones and once they figure out the answers to these questions only then can they determine how they will deal with their financial distress. Therefore, if the businesses or organizations decide they want to fight for themselves I feel that the restructuralization of the business would be the best way to at least try before throwing in the towel. That is just me do you think it would be best or is there a better way to a business can fight for themselves?
References
Financial distress. (2015). Retrieved February 10, 2015, from http://www.investorwords.com/7302/financial_distress.html
Financial distress costs. (2015). Retrieved February 10, 2015, from http://www.investorwords.com/15398/financial_distress_costs.html
Kroll, K. (2015). From Debt to Debt Free: Five Steps to Solving Financial Distress. Retrieved February 10, 2015, from http://businessfinancemag.com/blog/debt-debt-free-five-steps-solving-financial-distress
Topic 4: Foreign Exchange Market
There are many corporations that do not operate only in their country of origin. These corporations operate both nationally and internationally. Such corporations are called international corporations or multinationals. For a corporation to decide to operate internationally, it has to consider many financial factors that do not directly affect merely domestic firms. Some factors that international corporations consider are foreign exchange rates, foreign tax rates differing interest rates from country to country and also foreign government intervention (Ross et al., 2013). Hence, the foreign exchange market acts by providing valuable information and opportunities for these international corporations when it undertakes capital budgeting and financial decisions.
The world’s largest financial market is the foreign exchange market. It can also be called the Forex Market or the currency market (Go Currency, n.d). In the foreign exchange market, the currency of a country is traded for the currency of another country. According to an article posted on the Go Currency website, the foreign exchange market is a market where currencies are traded. The forex market is the most liquid (cash) market, differentiating it from other markets. Interesting, the foreign exchange market does not have a single location where traders meet and carry out financial transactions. It is an over-the-counter market. Also, market participants have to privilege to compare prices before trading currency. In this effect, dealers have the opportunity to decide on which market in which to trade from. The commodity in a foreign exchange market is the currency. Traders in this market either buy or sell currencies. Persons who participate in this market are situated in major commercial and investments banks all over the world. Technology has made it even easier for operators to communicate with each other. Communication is carried out through the telephone, or the use of computers and other telecommunication devices (Ross et al., 2013). An example of a communication system that is utilized in the foreign exchange market is the Society for Worldwide Interbank Financial Telecommunication (SWIFT) (Ross et al., 2013). In a real world situation, if a bank in country X wants to wire money to a bank in country Y, the bank in country X requires the SWIFT number of the bank in country Y. The SWIFT is a Belgian not-for-profit cooperative. Even though it is said not-for- profit, banks use different bank changes to market money off their customers who carry out wire transfers and other bank transactions that require the SWIFT number. The SWIFT communication network works by using data transmission lines. Using the example above, country X can send messages to country Y through the SWIFT regional processing centers.
According to gocurrency.com, the four major currency pairs that are traded in the foreign exchange market is EUR/USD (EURO/U.S DOLLAR), USD/JPY (U.S DOLLAR/JAPENSE YEN), GBP/USD (BRITISH POUND/U.S DOLLAR), and USD/CHF (U.S DOLLAR/SWISS FRANC). In a currency pair such as USD/JPY, the first currency is called the base currency while the second currency in the pair is referred to as the counter currency. As a result, USD is the base currency while JPY is the counter currency. The pair can simply be explained as, how much of the counter currency can be used to purchase the one unit of the base currency. According to this statement, the base currency is the currency that is being bought while the counter currency is the currency that is being sold.
An example of a foreign exchange is that conducted by the Federal Reserve Bank of New York. In the foreign exchange market, the Federal Reserve Bank of New York undergoes all foreign exchange related activities on behalf of the Federal Reserve System and the U.S. Treasury (FRB, 2014). The function of the Federal Reserve Bank is to monitor and analyze all future developments that occur in the global financial market. It also manages the U.S foreign currency reserves and intervenes in the foreign exchange market where need be. The bank also carries out foreign exchange transactions on behalf of its valued customers.
According to Ross et al. (2013), there are different types of participants who participate in the foreign exchange market. Some include importers, exporters, portfolio managers, foreign exchange brokers, traders, and speculators. These participants have different functions in the forex market. The importers are those who pay for goods by using foreign currencies. The exporters are those who receive foreign currency and intend want to convert it to the domestic currency (the currency of their home country or the currency in the country in which they reside). Portfolio managers are those who purchase or sell foreign stocks and bonds. Foreign exchange brokers sell and buy orders while the speculators are those who try to profit from changes in exchange rates.
There are three primary functions of the foreign exchange market. There are to transfer function, to credit function and hedging function (Chand, 2015). The foreign exchange market carries out its function of transfer function by transferring purchasing power among countries that are involved in the transaction. It does this by providing credit instruments such as foreign exchange, bank drafts, and even telephonic transfers. In order to carry out its credit function abilities, the foreign exchange market provides credits for foreign trade. An example is the bills of exchange. The bills of exchange are used for international payments and have a maturity period of three months. The bills of exchange give an importer the privilege to take goods on credit, sell them and pay the bill when the goods are sold. Hedging is a term used when exporters and importers enter into an agreement to sell and buy goods on some future date at the current prices and exchange rate (Chand, 2015). When importers and exporters sign this agreement, any variation in the exchange rates does not have an effect on the prices of the goods they signed for.
Two kinds of foreign exchange market exist: spot market and forward market. The spot market is a market that the receipts and payments of goods are made immediately. A forward market is one in which sale and purchase of foreign currency are settled on a specified future date at a rate agreed upon today.
References
Chand, S. (2015). Foreign Exchange Market: Meaning Functions and Kinds. Retrieved from
http://www.yourarticlelibrary.com/macro-economics/balance-of-payment/foreign-exchange-market-meaning-functions-and-kinds/30428/
FRD. (2014, October). Foreign Exchange. Retrieved from
http://www.ny.frb.org/markets/foreignex.html
Go Currency. (n.d). The Foreign Exchange Market for Beginners. Retrieved from
http://www.gocurrency.com/articles/forex-for-beginners
Ross, S., Westerfield, R., & Jaffe, F. (2013). Corporate Finance. (10th Edition). Retrieved from
http://www.coursesmart.com/0077511352#extendedisbn
Topic 5: Acquisitions
Mergers and acquisitions are typically referred to as one in the same, however, an acquisition differs from a merger in a few ways. An acquisitions is where a larger (usually more successful) company purchases another smaller company and the smaller is for the most part absorbed into the other. The company name and shareholders remain the same; the purchasing company’s stock continues to be traded as usual (Gomes, 2011). In contrast, a merger is where two similarly sized (and successful) companies join together and form a new. The company name and shareholder details typically change - new stock under the new name are issued. If a merger occurs and one of the companies are unwilling to merge, then this is usually referred to as a “hostile takeover” and therefore it is considered an acquisition because it was not a mutual agreement.
There are various ways to describe an acquisition depending on the type of businesses involved and the ultimate result after the acquisition has been completed. One type of acquisition is called a “horizontal” acquisition. This is where there are two companies with very similar products/services (typically competitors) that are in the same industry and one is purchasing the other (Gomes, 2011). An example of this would be when AT&T attempted to acquire T-Mobile wireless company back in 2011. These are two large wireless carriers that would have combined into one. Unfortunately, the acquisition was never approved. Had the deal come to fruition, then AT&T would have been considered the largest wireless telephone carrier in the United States; significantly larger than any of it’s competitors by far (Golding, 2011). The department of justice blocked the acquisition through several hearings due to the negative impact the deal would have on customers, new innovation, and the other smaller competitors (Golding, 2011). They were essentially preventing AT&T from becoming a monopoly (Golding, 2011). Though this deal did not go through, there have been many acquisitions in the wireless telecommunications industry that have successfully completed horizontal acquisitions. Often in this type of deal, the purchasing company may continue to share employees, clients, suppliers, and business processes. However, after the combination, there are cost savings (or “synergies”) for the purchasing company due to the sharing of resources and elimination of redundancies (Boone, 2009). Where overhead can be reduced by eliminating additional facilities, products and business processes from the sold company that enhance the purchasing business can be utilized.
Another type of acquisition is a “vertical” acquisition. This would be when two companies that offer different products/services within the same industry are combined. Usually their operations are complimentary in nature due to the fact that one is beneficial to the other or an extension of the products/services already offered (Gomes, 2011). An example of a vertical acquisition is when Comcast acquired NBC Universal in 2011. Initially, it was a joint venture due to the fact that Comcast purchased 51% majority in NBC Universal and GE held the remaining 49% (Yoo, 2014). Then, in 2013 Comcast was able to purchase 100% ownership of NBC Universal. Comcast being a distributor (or transmission company) and NBC Universal a video content provider; the combined company was able to provide the services of two within the same industry (Yoo, 2014). With this type of transaction, there could also be shared resources, but also provided growth of product/services provided by the purchasing company (Comcast). GE on the other hand was eliminating a less related business segment so it could focus resources on more industrial-type industry for which the company was initially created (Yoo, 2014).
Some may refer to Comcast’s acquisition of NBC Universal as a combination of a vertical acquisition and a horizontal acquisition due to the fact that Comcast had previously begun to distribute video itself prior to the acquisition of NBC Universal - and therefore was already providing a similar service and acting as a direct competitor (Yoo, 2014). In addition to the vertical integration explained above; the fact that Comcast was including NBC’s video programming into it’s newly existing video programming and NBC’s broadcasting into it’s video network, there were some horizontal aspects to this acquisition as well (Yoo, 2014).
Another type of acquisition is called a “conglomerate” acquisition. This would be when two unrelated companies which have not been operating in the same industry combine. The value of a conglomerate acquisition is for a company to expand into new markets, reduce their risks by diversifying, eliminate redundancies, and improve costs/profits through synergies (Gomes, 2011). A prominent example of a conglomerate acquisition was when Walt Disney Company acquired the American Broadcast Company (ABC)/Capital Cities in 1995. This deal was known as one of the largest corporate takeovers in history and would result in Disney becoming the first media company to have a stake in four distribution systems (Fabrikant, 1995). These included film, cable tv, broadcasting and telephone. The combined company would include the most powerful tv network and ESPN cable service with Disney’s film, tv studios, Disney Channel, amusement parks and it’s repertoire of cartoon characters, merchandise sales and services (Fabrikant, 1995). In fact, this acquisition almost suffered the same fate as the AT&T - T-Mobile acquisition where it was almost blocked by the government due to concerns over “deregulation of the country’s communications industries” (Fabrikant, 1995).
Finally, acquisitions can be further characterized as complimentary or supplementary in addition to whether they are horizontal, vertical or conglomerate acquisition deals. A complimentary acquisition is one where the purchase of a company compensates for a weakness of the company acquiring it (Gomes, 2011). For example, a large staffing firm can provide great service and staffing solutions, but lacks the expertise of marketing and sales and therefore acquires a similar company that has this aspect already well established. On the other hand the motivation could be a geographic location, an example would be Anheuser-Busch's sale to InBev in 2008 (Hakkinen, 2005). InBev was a Belgian-Brazilian brewing company that acquired Anheuser-Busch and thus it’s US customer base, breweries and top presence for domestic beer (Boone, 2009).
Slightly different is a supplemental acquisition where a company acquires another that acts to reinforce and strengthen it’s existing qualities within the same industry and location (Gomes, 2011). For example, wireless companies in the US have purchased additional wireless companies in order to strengthen and expand it’s customers and networks. The scenario with AT&T described above (had the deal been completed) would have been an example of a horizontal and supplemental acquisition. Typically, supplemental acquisitions are horizontal-type acquisitions as they both promote the merging of similar companies in order to improve operations.
Therefore, how financial analysts refer to acquisitions largely depends upon the type of businesses that are involved in the acquisition, the industry of each of the businesses, and the strategy behind what the purchasing company is trying to accomplish.
References:
Golding, P., Tennant, V., & Virtue, T. A. (2011). Telecommunications in Jamaica: Monopoly to Liberalized Competition to Monopoly (2000–2011). University of Technology.
Yoo, C. S. (2014). Merger Review by the Federal Communications Commission: Comcast–NBC Universal. Review of Industrial Organization, 45(3), 295-321.
Fabrikant, G. (1995). WALT DISNEY TO ACQUIRE ABC IN $19 BILLION DEAL TO BUILD A GIANT FOR ENTERTAINMENT. Retrieved February 8, 2015, from http://www.nytimes.com/1995/08/01/business/media-business-merger-walt-disney-acquire-abc-19-billion-deal-build-giant-for.html
Gomes, E., Weber, Y., Brown, C., & Tarba, S. Y. (2011). Mergers, acquisitions and strategic alliances: Understanding the process. Palgrave Macmillan.
Hakkinen, L. (2005). Impacts of international mergers and acquisitions on the logistics operations of manufacturing companies. International Journal of Technology Management, 29(3), 362-385.
Boone, A. L., & Mulherin, J. H. (2009). Is There One Best Way to Sell a Company? Auctions Versus Negotiations and Controlled Sales1. Journal of Applied Corporate Finance, 21(3), 28-37.
