Question

Wildly Successful Company The corporation has been wildly successful, in this, the third year of operation. While operating in the social media advertising arena can be risky, the corporation has been able through strategic alliances and timely hires, to stay ahead of the profit curve. While the stock price continues to escalate since IPO, some shareholders grow weary of no dividends. A dividend would allow the firm to finally be listed on the NYSE, opening more capital potential to the firm. As is true with any technology firm, there are corporate raiders lurking hoping that management slips, so the firm can be swallowed up. Few shares are owned by the management team- only 12% of all outstanding shares. Approximately 20% of the firm’s shares are in treasury, not because of an under-subscription, but because the firm purchased shares for the last two years in a buyback. As the CFO of the firm, management turns to your leadership on strategic financial issues. Specifically, 1) what should the firm do about dividend policy- be specific, and 2) what can the firm do long-term to protect the organization from corporate raiders? (A two to five page report will satisfactorily meet this requirement).

Answer 1

1.)Wildly successful company has been able to be successfully run for 3 years it is a new firm, given the capital requirement will be high,as the company has been performing and owing to growth strategy plans the company opting for giving direct cash to existing shareholders can create more troubles than benefits, diving straight to the dividend policy

Dividend policy:

The company should keep its shareholders in confidence that the firm is very new and owing to the nature of business the idea of sharing profits in near future will be availed, although no particular time should be mentioned

The dividend would allow the company to be listed on NYSE, but it will affect at present the capital required for strategic operations, there are other ways the company can make shareholders happy, by sharing the belief about how the company is expanding rapidly which in turn will let the share prices to escalate in the market.

As the prices will escalate, the fear of corporate raiders will be minimized, another way of giving the dividend which is not in the form of direct cash is buybacks which the company is following from the past two years

The company should announce the plan in the upcoming Annual general meeting about the buybacks on successful completion of 5 years, so as to increase the treasury shares which has three advantages,

The shareholders will become optimistic about the dividends in the form of buybacks and give a strong message about the company not distributing just profits as cash and management belives in the strategic decision of the company

Also the company being a technology company should maintain the list of copyrights and patents which are listed for an period of time

Coming to the capital requirement

Company can raise the capital by issuing the bonds of 5 year or 10 year bond with a floating rate coupon which will help in subsiding the capital requirement for the time being and such capital can be used at the same time to buy the shares of the company.

Another option of raising capital will be releasing the bonds or convertible debentures  in the other continents which will have the numerous advantages as the company will increase it to more than one nation and will give the oppurtunity to be multinational in nature.

2) For company to keep in check of the corporate raiders the following methods should be maintained

The company should keep the option of buybacks open as the company has least no. of shares

With the help of buybacks, treasury shares will increase and at the same time the company will be get rid of the corporate raiders, although the company should be able to deploy some options such as owing to uncertain conditions if a takeover happens that is company is able to sell its valuable asset overnight to one of its strategic alliances partners

Distributing the shares to the employees

The most effective way of keeping the employees and at the same time make them feel valuable is by distributing the shares among the partners of the firm in the form of non profit sharing non convertible debentures which cannot be sold as a part of equity for limited period of time

Other techniques such as golden parachutes will keep in check the internal corporate raiders.

Strategic alliances

The only way the company can survive the take over is when the company maintains sufficient amount of shares upto (say 49%) with itself, although it need not be in the form of treasury shares, being in the technology firm every big firm is moving towards automation and in need of technology the company should look for a strategic alliance a suitable match which already is existing but non technological in nature and in need of the resources wildly can provide.

This alliance will allow the company to maximize the business with the new client and also keep its business as the name will be associated with the non technological firm and the takeover cannot happen the shares say 15% will be with its partners

So here will be new breakdown of the shares

Non technological partner 15%

Employees 5%

Management team-12%

Treasury shares 20%

Completely 52% of shares will be within the company which the company can keep of track of any change in the above and plan the action appropriately