Executive Summary of the Report
It is unanimously recognized by the practitioners and the scholars, that the effective analysis is the backbone for almost all successful managerial or administrative decisions in business (Madura, 2001). To be more exact, when a decision is taken without prior meticulous overview of the financial, managerial and stock profile of the company, the decision in question may happen to be a lethal one for the favourable business environment of the targeted entity.
Business analysts strongly recommend implementation of various analytical and researching strategies in order to promote a healthy business environment of a commercial entity (Quian, Strahan, 2005). The successful accomplishment of this task involves a comprehensive approach, for which sufficient practical experience is required. The experience can be acquired either personally by the authorized managers or those who are expected to deliver a respective decision which can hypothetically influence the existence of the company , i.e. it can be accumulated empirically, or another opportunity involves the acquiring thereof on the basis of the analysis of a third company.
This business report has been composed to analyse the activity of Genus PLC. This public limited company is headquartered in Basingstoke, the United Kingdom of Great Britain and Northern Ireland; the company manufactures biotechnological nutritional components for cattle and pigs. The company is a constituent of the FTSE 250 index, since it fully meets all the eligibility requirements.
The report is commenced with an extensive literature review and methodology sections, used with the intent to substantiate the choice of specific literature works and methods of empirical research utilized to expose the nature of the discussed business entity.
This report is aimed at analysing the ways in which the financial managers of the company make their financing decisions. To be more exact, the chapter one of the report is focused on revealing how the targeted business entity manages its short-term, middle-term and long term financial resources. Moreover, chapter one of the targeted business report analytically analyzes the respective equity and debt equity valuation and the applied gearing decisions methodology of the company.
The second part of the present business report is closely tied to the analysis of the working capital management of the company. The focus of the report is placed on the way the authorities of the firm manage cash-related resources, and on inventory management and debtor’s management. Although done superfluously, the analysis involves the aspects connected with the strategy the company uses to handle its short-term financing decisions.
Chapter three of the report involves the analysis of the company owners’ return (with regard to the application of the IRR) and the way the control decisions are adopted and implemented by the owners of the company. Moreover, the company clearly elucidates the aspects connected with the current dividend policy and prospective M&A transactions of the firm, with special accent made on the standards imposed by the scholars and comparative chart of the activity of the close competitor
Considering the particularities of the chosen research topic, the accent has been made on the studies which were destined to address the aspects connected with the microeconomic environment of the company. The literature works and studies have been chosen with consideration of the present research topic, their academic authenticity and scholarly credibility. Moreover, the accent has been made on the
In the context of the medium term financial instruments utilized by a contemporary business entity, the criterion and peculiarities of the available instruments have been laid out in the work of Bergolf and Bolton (2005, The Great Divide and Beyond: Financial architecture in transition, published in Journal of Economic Perspectives) . Another significant and informative exploration of the currently available scholarly studies on the related subject has been made by Quian Jun and Philip E. Strahan, (2007, How Law and Institutions Shape Financial Contracts). The main message of this study is the encapsulation of the scholarly opinion on the most effective instruments which are currently used by the companies to handle the medium term financial issues, and also it outlines practical application of the issues thereof. The book of outstanding Californian finance professor Madura (2001, Financial Markets and Institutions) reveal the role which is played by the banks and credit unions and how the medium term finance mechanism conditioned by these entities can be utilized by a company. The stud composed by Allen and Gale (1994, Financial Innovation and Risk Sharing) outlines the standards that are used by the modern business communities to measure the efficacy and efficiency of the instruments used by them to safeguard the medium finance instruments and to profit from their utilization. The most important exploration of the aspects connected with lease equipment utilization, the practice and the empirical evidence , supported by the opinion of the contemporary financial luminaries in the field of lease financing and banking loans have been provided by the co-joint work of Grinblatt and Titman, 2002 Financial Policy and Corporate Strategy
Genus is a public limited company incorporated under the laws of Great Britain and headquartered in Basingstoke. In 2011 the company reported to have accrued £ 309,9 in 2011 with 44, 8 million in operating income and 29,2 million in net income collected.
The firm operates in the biotechnological sector of the economy, producing the related commodities domestically and selling them internationally and domestically as well. The company targets cattle and pig farmers as its main customers and was ranked in the FTSE 250 Index. The two separate independent divisions of the company are ABS, which represents the production of biotechnological products for cattle and PIC group, which targets the pig breeders as the main customers group.
Impressive financial results performed by the company, especially with consideration to the repercussions of the recent European financial crisis are due to the effective monetary policy followed by the company and the utilization of the financial leverages employed by the firm, including long term, short term and medium term financial strategies.
Dividends and M&A Policies
This chapter of the targeted case study has been completed to analyze the internal and external dividend policy of the company and the prospective M&A transactions which are likely to be conducted by the firm in the foreseeable future and to contrast these figures with the existing scholarly standards and empirical evidence of the contemporary business practice (Allen, Gale, 1994).
Dividends are regular payments which are exercised by the company to the favor of the company shareholders (Berghol, Bolton, 2001). Having accrued the revenue the targeted company may either re-invest it to the existing or existing company investment projects or it may distribute it among the shareholders of the company. The second option and the way it is practically implemented is discussed in this chapter of the paper. The accent is made on the dividend distribution policy which is followed by the company and the way it differs from the postulates prescribed by the contemporary domestic and overseas business scholars and business practitioners.
In 2008 shareholders of the company hold 55 931 344 shares emitted by the firm on the open market. In 2009 the number of the shares that freely rotated on the market reached 59 455 605, in 2010, 2011 and 2012 the figures increased on 59 525 274, 59 678 535 and 59 933 085 respectively. It is evident that annually the shares subscription was deliberately increased by the company irrespective of the financial performance demonstrated by the firm and financial constraints generated by the crisis-related events and other global financial determinants. Market capitalization raised by the rotating shares was reported to be £ 392 million in 2008, 485 in 2009, £307 in 2010, 445 in 2011 and £618 in 2012. Having analyzed the changes that happened in the capitalization structure of the company, it becomes evident that the firm financial tem managed to double the capitalization accrued within the 5 years term. Although the culmination of the financial crisis which took place in 2010 resulted negatively in the general capitalization of the firm ( the cutback in comparison with 2012 was almost 50%) , 2011 and 2012 demonstrated significant financial enhancements in the field discussed.
Having reviewed the financial statements issued by the company, several important conclusions can be inferred. First and foremost, the company DPS was gradually increasing from 30, 8 in 2008 to 46, 3 in 2010 and 49,0 in 2011. The slight downfall to 30,4 was reported to have taken place in 2009, at the height of the financial crisis of the company. The DPS of the shares collected by the company was also reported to increase from 8,25 in 2008 to 9,1 in 2009, 10, 0 in 2010, 11 in 2011 and 12,1 in 2012 respectively. Considering the closing share price of the company (700 in 2008, 816,5 in 2009, 515 in 2010, 745 in 2011 and 1031,0 in 2012) it can be inferentially concluded that the dividend payment policy followed by the firm is considerably successful due to the fact that the figures are significant in comparison to the performance demonstrated by the competitors of the company (Allen,Gale, 1994).
The empirical findings indicate that the firm is obliged to pay dividends to the shareholders of the firm on the annual basis with the amount of the paid dividends slightly increasing the amount which the shareholder could have hypothetically accrued if he or she becomes a bondholder. In this regard, the analyzed data clearly indicates that the targeted business unit fully meets the existing dividend payment standards imposed by the market, although slight deviations do exist.
The dividend yield to the company is reported to be 0,012 in 2008, 0,011 on 2009, 0,019 in 2010 , 0, 015 in 2011 and 0,012 in 2012 in particular. Following these assumptions and having compared then with the existing business practice standards, which precisely indicate that the excess of 0,01 the dividend yield is particularly lucrative for the targeted consumers’ group of the company.
Mergers and Acquisition Transaction and their Relevance to the Targeted Company
Having reviewed the performance of the company, it shall be accentuated that the overseas competitors of the company have numerously approached the management of the company offering to merge the company. The first viable offer was made by the Danish biotechnological giant NovoNordisk in 2001 (Fubini, Colin,Zollo, 2007). Erstwhile , the capitalization of the prospective purchaser exceeded the capitalization of the Genus Plc. on 200% and the transaction did seem to be attractive for Genus, especially with regard to the fact that the key people of then Genus were offered top executive positions in the newly-formed entity (Fubini et. al, 2007). The proposition was declined due to the fact that the management of the team perceived that if the firm stood independent , the revenues accrued would be definitely considerably larger than if the firm decided to merge.
The second offer took place in 2004 from Gilead Sciences, the USA based biotechnical research unit and one of the leading industrial fertilizers producers. In accordance to the popular scholarly opinion, the market advantages of that transaction were evident for Genus, since the company was given the opportunity to raise it market capitalization, to diversify the resources of the company geographically and to get accessed to new markets and to reduce the costs of sales of the firm. In particular, it was reported that the transportation costs to deliver the commodities to the United States of America, the country which is known to be among the primary markets of the firm.
Overall, during the 2005-2012 financial years, the management team of the firm received several lucrative mergers offers from CSL Biotechnology, Australian-based firm, UCB Group from Belgium and Bio Marin Pharmaceutical from the United States of America. All propositions have been equally declined by the company authorities.
The opinion of the scholars in this section is twofold. While the first group of them fervently supports the idea of mergers for FTSE rated company, their opponents are firmly opined that M&A oriented policy is not an option for the company. The M&A policy of Genus Plc. can be characterized as totally inflexible due to the fact that it didn’t reciprocate the offers of the competitors. Therefore, the main disadvantage of the active M&A policy, i.e. the inability to take the managerial decisions independently became the predominant motive to decline the offers made.
The productive cycle of the company is complex and involves the supply of the raw materials from the contractors, processing thereof. The process can be defined as continuous one, while the revenues (net income) are collected at the final stage of the company financial performance. Therefore, the company extensively relies on the available means of short term, medium and long term company capitalization, debt and equity instruments and other means to increase the capitalization.
Short Term Finance Instruments of the Company
The business definition of short term financial sources used by the company purports that they are the means to raise the amount of the company capitalization and last no longer than one year. Although there is a scholarly dispute as whether the financial instrument used for 5 years term or longer can be considered short term finance means, since the overwhelming majority of the scholars consider them being classified as “ medium term finance instruments”. Another criterion that is used to determine that specific section of the company financial resources can be in fact attributed to short-term section is the fact that they are included to the short term (less than one year) financial plan of the company.
Short Term Bonds Issuance
The company utilizes various sources to fill it financial funds. First and foremost, the company extensively utilizes bonds. The bond interest rate is 3% monthly in accordance with the promulgated corporate financial policy. The financial statements annually issued by the companies indicate that the firm differently relied on the annually issued bond. To illustrate in 2007 the firm received about 5% of its capitalization by means of bond issuance, while in 2008, 2009 and 2010 due to the grave repercussions ensued from the devastating 2007-2010 financial crisis, the company in question collected about 13% of its annual capitalization by means of bond issuance. 2011 and 2012, with the general sanitation of the global financial environment and the financial recuperation of the national financial system resulted in the decrease in bonds utilization and only 4% of the company capitalization was raised by means thereof. One of the most important peculiarities of the bonds issued by this company is the fact that in comparison to the general market situation the bonds issued by this business entity promised relatively high interest rates, having lagged behind the majority of the competing business groups and attracted the bondholders with ease (averagely, the bond interest rate of the targeted company was fixed on 1, 5% - 2% higher than those offered for sale by the competitors.)
Short Term Preferred Stock Issuance
The issuance of a preferred stock is a disposable option to raise the capital on a short term basis. Preferred stock dividends are to be page in the first turn, and that is the factor that attracts the shareholders. If the company encounters financial distress or its performance is somehow otherwise imperilled, the holders of the preferred stock are the one who may be assured that their rights are safeguarded and guaranteed in the event the firm cannot meet its obligations. The company’s annual financial statement precisely indicates that the firm raised 12 % of its capital by means of preferred stock issuance. These type of shares issued by the company are traded on the New Your, London and Tokyo Stock Markets. Financial analysts label them as highly tradable.
In 2007 closing share prices were reported to be 700, while in 2008 the price was reported to be accordingly increased on 816, 5. 2009 was remarkable for the drastic reduction in the value of shares, and the closing price was reported to be 515, while in 2010 and 2011 the prices relatively recuperated showing 745 and 1031 respectively. Having analysed these figures it becomes evident that the issuance of the company stock is in direct dependence with the general financial environment of the country.
Short Term Common Stock Issuance
Under the normal financial conditions the company raises its capital by means of common stock issuance. Genus public limited company issues common stock of two types. The first type promise the shareholders to pay big dividends, while the second one does not provide the pay-out of the regular dividends at all (Allen, Gale, 1994). On the other hand the second type of the common stock is becoming popular among the shareholders of the company due to the fact that these shares can be subsequently re-sold. With the increase in the company profitability and capitalization of the firm, the value of the shares increases accordingly. In 2011 the value of share was reported to be 745 and in 2012 it reached the value of 1031, it depicts that with the recuperation of the European financial market from the repercussions of the recent financial crisis, the firm started to rely on the capitalization raised by means of stock collection (8% of the entire capitalization of the firm are raised by means of stock issuance)
Short Term Borrowing Instruments
The company financial policy explicitly indicates that the firm hardly utilizes the available borrowing instruments provided by the United Kingdom and international banking and credit institutions. However, in 2008-2010, due to the heavy financial circumstances generated by the financial crisis that swept over the continent erstwhile, approximately 10% of the company capitalization was raised by means of short term borrowing. The main partners included banking institutions of the United Kingdom and other credit unions.
Profits of the Company
In accordance with the proclaimed corporate financial policy, the firm extensively re-invests the accrued profits into the research and expansion of the production facilities of the company. In the present instance, the annual statement for 2011 manifests that 17% of the entire income generated by the firm was invested into the exploration of the new productive facilities and the introduction of the brand-new technologies used by the company.
Medium Term Finance Instruments
Medium term finance instruments are the one, which application is limited to 5 year term. The most popular instruments used by the targeted company are banking and other financial loans, which indeed play the predominant role in the composition of the company financial structure, leases and medium term bonds and utilization of the venture capital.
Having viewed the financial structure of the company, the medium term capital presents to be 18% of the entire financial resources available to Genus PLC.
With regard to the currently applicable medium term finance instruments, the most effective instruments do seem to be loans used by the firm.
2008-2011 fiscal years indicated that the company used approximately medium term bank borrowing to cope with the growing fund deficit and to pay out the due payment from the short term company section. The major partners of the company included Standard Charter (the share of the loans provided is 50%), HSBC banking group (37% of the funds loaned by the Genus Group) and Barclays Bank of the United Kingdom (the remaining 13% of the loaned capital).
Alongside with the loan finance mechanisms, the company also issues 4 years bonds with 4% of bond interest rate. The bondholders report that the bonds are stable and tradable on the market and are always in demand by the targeted customers groups. Medium term bonds are estimated to be 3% of the total capital of the company.
Another form to raise the capital of the company which is utilized by the Genus PLC is the installation of the Venture Capital entities. The independent national and overseas investors invest into the company and participate in the managerial processes of the company. Totally, the use of venture manifest that about 12% of the capital raised by the company comes from this source.
Long Term Finance of the Company
The long term financial instruments used by the company are considerably more complex in their natures due to the fact, that are classified into two groups, the external and the internal ones. The internal ones include retained earnings, which, in accordance with the declared corporate financial policy constitute 5% of the entire earnings made by the company during the 2007, 2008 and 2009 fiscal years. With the deployment of the global financial crisis, the company financial authorities decided to save 7% of the income generated as retained income. Considering the fact that long term capital has being been accumulated since 2007, it can be attributed to the section of long-term capital used by the company.
The external sources of the long term finance used by the company are the following:
Approximately 68% of the entire long-term financial instruments used by the company are generated by means of long term shares emission and distribution. Currently the company emits both types of the two popular share types, i.e. the privileged and the common ones. The common stock is promised to bring 12% of its nominal value, while the preferred one brings the company 15 % of its nominal value.
Overall, the analysis of the short term, medium term and long term financial instruments normatively used by the company can be presented in the below situated table:
Having analysed the pie diagram, it becomes evident that the biggest part of the capital raised by the company can be attributed to short term and long term capital, whilst the role played by medium term capital structures remains practically insignificant, although 8% cannot be considered non-important, according to the popular opinion of the leading financial analysts.
Debt to Equity Analysis
The debt to equity ratio is sometimes referred by the financial analysts and scholarly luminaries as gearing or leveraging (the first term is used in the United Kingdom, while the second is predominantly used in the United States of America)
The following ratios can be deducted on the basis of the annual financial statements published by the company:
2008 ED= 110,3/ 392=0,28
2009 ED = 78,2 / 485=0,16
2010 ED = 105,2/307=0,34
2011ED = 95,6/445=0,21
2012 ED = 81, 3/ 618=0,13
The data indicated above precisely indicates that the leveraging of the company directly depended on the general financial environment of the company. It is evident that the years when of the overall European financial recession. The culmination of the financial crisis took place in 2011 and it became evident that this financial year was crucial for the company to rely heavily on the gearing opportunities.
The Management of the Working Capital
This section of the paper examines how the company in question operates its cash management, outlines the key feature on how the firm operates its inventory management projects and the discourses over the company debtors’ management procedures.
The working capital of the company is known as a financial paradigm of the targeted business entity available for the firm and which is liquid in its nature (Fubini, Colin, Zollo, 2007). Working capital is considered to be an integral part of the operating capital of the company, together with the equipment. In accordance with the popular scholarly opinion, the great aim of the proper working capital is the capability of a business entity to convert the assets of a business entity into cash. Another goal of the accurate management of the working capital is the ability of the business unit to cope with the operational expenses of the company.
The scholars establish the popular criterion which shall be used by the business entities to ensure that the firms operate successfully. The policies and techniques are different. The first section is the management of the cash resources available to the company.
With regard to the published financial statement of the company, the following working capital was used by the company during the latest ten accounting years.
It is evident that the current assets ratio collected by the company is significant enough for the company to cope with the pressuring financial constraints and other issues that both directly and indirectly influence the financial environment of the company.
It is to be highlighted, that the ratio of assets and liabilities is often used by the business analysts to ascertain whether the company performs successfully or not. For 2008 year the performance of the company can be classified as relatively successful, since the assets do exceed the liabilities on more than 50%. The ratio for the next year was almost the same, due to the fact that similar financial circumstances pressed the company. Special attention shall be laid to the fact that the major sources of the revenue are credit sales.
2009 fiscal year was remarkable due to the fact that the liabilities assets ratio ascended 50%. Most importantly, the company heavily relied on the available mechanisms tom collect revenues.
The lowest net working capital was reported to have taken place in 2009 due to the grave conditions of the global financial crisis. Although the assets collected in 2008 were bigger than the ones accrued in 2009, the net working capital available for the firm in 2009 was lower. The net working capital was evident to become gradually increased by 2012 due to the fact that the revenues. In accordance with the popular scholarly opinion, the net working capital which exceeds the liabilities of the company is one of the best indicators that demonstrate that the company performs successfully. The net working capital was slightly reduced in 2009 due to the existing financial constraints.
The credit sales used by the companies are among the major sources used by the company to raise its capitalization. With the expansion of the company, the firm’s authorities resolved to increase its credit sales.
Specific attention shall be laid to the facts connected with the inventory days and cash conversion cycles of the firm. To be more exact, the inventory days of the company in 2008 was 59, 62, in 2009 72,27, in 2010 83,84, in 2011 – 107,80 and in 2012 104,96 respectively.
The cash conversion cycle of the company clearly indicates that the company currently experiences grave problems with the cash management conversion and the related procedures. Whereas in 2008 the conversion period took 74 days, it was gradually increased to 84 days in 118, 102, 60, 133,80 and 130, 73 in 2012. The market analysis of the available annular financial statement and other available documents precisely indicate that the ability of the company to convert its assets into the cash was considerably complicated.
The cash management section of the company indicates that the firm can experience considerable difficulties if the firm decides to sell at its assets immediately or it decides somehow otherwise to turn the assets into cash. However, the analyzed financial statements and other documents of the company precisely indicate that normatively the company is launching various strategies to meet the demands of the shareholders and to meet the standards of the effective cash management.
With regard to the way the firm operates its inventory management, the key data source is the annual financial of the company. The targeted documents precisely indicate that in 2008 the company reported to have 59, 62 days period of the required inventory days, while in 2009 this period took 72, 27 days. In 2010 it took 83, 84 days, shifting gradually to 107, 80 days in 2011 and 104, 96 in 2012. The existing standards dictated by the scholarly research and practice of the closest competitors of the firm show that no more than 50 days can be considered acceptable under the normal market circumstances and no more than 70 days are permissible under the crisis-related circumstances. Presently, the dataset clearly indicates that the firm totally deviates from the prescribed practical and theoretical standards.
The Association of the British Entrepreneurs has ruled out that the most acceptable period of the inventory under any circumstances shall not exceed 100 days (Bergolf, Bolton, 2001). Therefore, it can be assumed that the performance demonstrated by the firm in this paradigm after the global financial crisis was tackled is not acceptable in accordance with the existing business standards and the risk zone is big here. The company management team can be advised to launch new strategies to decrease this period. The most effective approach in this sphere is to re-orientate the marketing campaign of the firm and to apply new policies with regard to the inventory day’s management.
The latest section of the company working capital management which is to be addressed here is the way the company organizes and exercises its debtors’ management. Having reviewed the debtors days section of the company annual balance sheet, which indicates that in 2007 the company needed 54,17 days to collect all due payment from its debtors, in 2008 these procedures required 62,19 days, in 2010 the period spanned 60,01 days and 67,04 days in 2011 correspondingly. In 2012 the company needed to have 66,19 days at its disposal to collect the due payments. The debtors sales in their turn were increasing slightly from 34,7 in 2008, to 42,1 in 2009, 46,1 in 2010, 52,4 in 2011 and 56,2 in 2012 respectively. The existing standards established by the British economist, business practitioners and their overseas colleagues recommend the debtors period not to exceed 100 days period and the debtors sales not to exceed 15% of the all sales perpetrated by the company. In the present case it is evident that the company fully meets the established standards and therefore operates relatively successfully in this sector.
Overall, it can be inferred that the management of the working capital of the firm in general and its cash management, inventory management and debtors’ management in particular are conducted rather effectively by the firm. Although the figures demonstrated by the firm do deviate from the standards established by the contemporary practice, it can be inferentially concluded that when the inventory day’s period is diminished by the company to the acceptable 50 days, the company can be labeled as absolutely effective.
Having analyzed the accrued data it has become evident that the company indeed demonstrates outstanding performance in the sector in question. With regard to the utilized financing instruments, it can be inferentially concluded that the firm has focused its primary financial approach on the utilization of the short term finance instrument.
The dividends policy of the company is fully consistent with the existing APA standards, and moreover the firm is expected to demonstrate the same level of performance in the upcoming future.