Research Topics: Shareholder Value Creation Strategy

Shareholder Value Creation Strategy

Summary of Findings             Tomkins has changed its shareholder value creation strategy from financial to business focus.  It also diverted its concentration from short-term value creation to sustainable one.  This resulted to increase in dividend pay-outs in 2004 and 2005 despite acquisition regimes.  This means that Tomkins is capable to integrate its resources and its subsidiaries efficiently.  As a result, shareholders are granted with short-run benefits through dividend pay-outs and unrealized capital gains as Tomkins shares accelerate its market attractiveness.  However, despite this, it is recommended that the firm continuously evaluate its subsidiaries particularly in the areas of their debt.  Also, it must try to place investments (in portfolio form) on unrelated businesses to minimize industry risk coupled with investments in R&D to prevent risk of overly focus in acquisitions.            Creating Shareholder Value of Tomkins from 2001 to 2005             In the year in the initial years of this half decade operations, Tomkins had focused increasing the unrealized capital gains of its shareholders through buyback programs.  Especially in the years 2001 and 2002, this strategy was set to calm down shareholders amidst its disposal of some of its relatively unrelated subsidiaries like gardening products to concentrate in its core businesses and minimize its debts.  In effect, earnings per share increased that made its shares attractive for investors.  The buyback program suggested that the firm is confident in the future cash generating capability of a lean but mean business.                In 2002, a new CEO was promulgated.  This happening onwards started the abrupt acquisition strategies of Tomkins that was intended to purchase highly related companies to obtain synergy and strengthen available technology.  Year after year, earnings per share and share price increased beyond the level of disposal periods in 2001 and 2002.  Dividends that had remained flat at 12 pence from 2001-2003 had dramatically increased for the next two years.  This indicated that the less speculating shareholders were paid off in favor of long-term gains with the company.                Within this half decade, sales and profits remained constant.  This is rather atypical for a firm that had lost some of its good performing subsidiaries during the initial years of disposal.  However, as Tomkins ignored short-term attractiveness of a diversified and unrelated portfolio in favor of its core businesses, it exemplified an ongoing concern for shareholders to support its acquisitions.  It became long-term strategist wherein geographic expansion had not shaken its concentrated portfolio rather enforced its competencies by obtaining related businesses with technologies it can integrate to its existing businesses.                Shareholder returns at Tomkins surpassed the FTSE Engineering and Machinery sector by a huge margin.  It could be suspected that the success of the firm to protect the trust of its shareholder was derived early in its disposing tactics.  It had not only slashed the risks of its portfolio by doing this due to horizontal integration and economies of scale but also provide the cognition that it is focusing on long-term gains.  As a result, its return had also increased making its share more attractive year-after-year.                At the onset of 2003, the corporate scandal at Enron changed how Tomikins reported its annual performance.  Share price was not presented at single price rather a range of pricing for the past four quarters.  This can be translated as to discourage false financial promises for prospected investors.  However, even this lost opportunity for abrupt marketing of its share did not shaken the performance of the firm.  It even served as motivation to undermine financial for business strategies.  This situated Tomkins to create shareholder value within the veil of long-term relationship but with continuous (even increasing) dividend pay-outs.    Other Extraneous Report Analysis              It had acquired related businesses Selkirk, NGR and L.E. Technologies as well as sold its subsidiary that produces helmet (Gutter).  This strategy of Tomkins proved that it acquires for faster transfer of technology and to support its manufacturing/ supply chain.  Also, it is selling subsidiaries that are not within its core businesses like industrial, automotive and building materials.  It aimed for highly horizontally integrated business which makes investors minimized the risk of costly integration as Tomkins and the acquired firm resources are highly similar.  This cost savings will be allocated for geographical expansion instead. http://www.investor.reuters.wallst.com/stocks/key-developments.asp?rpc=66&ticker=TKS&timestamp=20060301143600             As the CEO admitted, the firm is volatile in industrial developments like oil prices hikes and increase in metal prices.  As the business of the firm becomes concentrated in highly related businesses, the volatility increases as it cannot offset such input hikes in other unrelated businesses, say, in food products where the adverse effects of industry and general environment forces are low.  Although shareholders are confronted with greater returns and sustainable growth, it is offset by higher risk of the firm’s volatility. http://www.forbes.com/markets/feeds/afx/2006/05/03/afx2716293.html               Recommendations             The firm must continue its business strategy focus.  This will provide investors the long-term relationship with the firm.  However, at times when strategies do not arrive at intended value creating results to shareholders, the 2001-2002 disposing regimes and buyback programs can serve as contingency actions.  In effect, balancing business and financial strategies attributable to shareholders should be maintained.  The need for this intensifies as Tomkins prefer a concentrated portfolio which means that it becomes volatile in every industrial bottleneck.                In the last few years of the half decade it deepened its acquisition with highly related businesses.  However, acquisition threats are just around the corner.  The risk of acquisition ended with integration difficulties and large debt must be taken in consideration.  As a result, diligent evaluation in the pre-acquisition stage becomes crucial.  At present, shareholders may exercise confidence in this expensive strategy, but if the firm fails to equate this sacrifice into profits at due time, it could threat the equity financing.                To minimize industry risk (like oil prices and metal material hikes), the firm should diversify, at least, in portfolio investments.  It could place a stake in other companies not with different environments and risks compared to its own.  Shareholders value can be created when their risk is carefully calculated and spread especially at times when the cost of inputs are extraordinary compared with previous operations.  Fund management should be obtained in order to provide shareholders the option to diversify their investments to companies in which Tomkins is spreading its own risk.               The firm must not overly focus on acquisitions.  This may halt its innovative capabilities since research and development feats are waived through buying companies which had already made them.  Yes, transfer of technology would be fast but can be offset by stagnant learning curve and employee urge to internalize innovation.  This situation departs to the firm’s commitment on long-run shareholder value since the risk of leaking the knowledge and loosing the knowledgeable people in the acquired firm are not minimized.  The advantage would turn out to be only temporary.     Appendices   2001 2002 2003 2004 2005 Financial Issues           Dividend payout Constant at 12p increased Buyback Programs Yes Yes none Earnings per share Normal range Share price   Increased No basis since it is a quarter performance             Business Issues           Highlight Disposal of subsidiaries New CEO Acquisitions; geographical growth     Sales Constant Profit before tax Constant   Note: Refer to financial statements for comparison http://www.tomkins.co.uk/docs/investor/reports.jsp     Bibliography Tomkins Website; London; viewed on 2 June 2006; www.tomkins.com.uk Credit:ivythesis.typepad.com

Shareholder Value Creation Strategy

Summary of Findings Tomkins has changed its shareholder value creation strategy from financial to business focus. It a...

Stakeholders versus Shareholders

<div class="entry-body"> Introduction                 The face of the business community has been constantly changing since the early part of the nineteenth century. Corporate structures have been morphing in order to adapt to the changing environments and situations that ultimately affects their operations. It is important for companies to adapt since doing otherwise could result to becoming obsolete. As the demands of the market changes so does companies. The need for change is fueled by the passion to achieve company objectives, which can be used to determine the success of an organization.               Flexibility is needed in order to adapt. This was observed when the rights of corporate boards to preside over without undisputed approval of shareholders in exchange for statutory benefits were enhanced by state corporation law in the nineteenth century (Contributors,

Stakeholders versus Shareholders

Introduction The face of the business community has been constantly changing since the early part of the nineteenth centu...

Stakeholders versus Shareholders

Stakeholders versus Shareholders

Introduction The face of the business community has been constantly changing since the early part of the nineteenth centu...

Shareholders’ Remedies

Gambotto v WCP Ltd [1995] 13 ACSR 342: The High Court held alteration is valid only if the majority of shareholders prove it is; for a proper purpose; and fair in all the circumstances High Court in Gambotto: “On the one hand, the courts have recognized that the proprietary rights attaching to shares are subject to modification, even destruction, by special resolution altering the articles & that power is exercisable by a shareholder to his/her own advantage. On the other hand, the courts have acknowledged that the power to alter the articles should not be exercised simply for the purpose of securing some personal gain which does not arise out of the contemplated objects of the power.”   Expropriation of Shares Gambotto’s Case Majority S/H in WCP held over 99% of share & sought to alter co’s articles so as to allow them to acquire all shares   High Court: Such an alteration is valid only if majority S/H prove it is: ü    For proper purpose & ü        Fair in all circumstances   Proper Purpose High Court in Gambotto: “An expropriation of shares would be for a proper purpose if it prevented the company from suffering significant detriment or harm”   What would the court consider as an “improper purpose”?   Improper Purpose   Securing taxation & administrative advantages for majority S/Hs Gambotto Compel sale of shares of a member who had formed a competing business Dafen v. Llandlly Get rid of minority S/Hs  Brown v. British Abrasive Wheel   Fairness Two elements: ü        Process of Expropriation must be fair ü        majority must disclose all relevant information leading up to the alteration ü        Price must be fair Prima facie unfair – if price is less than market price However, market price – not sole criterion Other factors, including assets, market value, dividends, and nature of co & future – need to be taken into account   Gambotto laid down two tests that set a limit on the power of the majority of shareholders to change the constitution of the company: a)      a change to the constitution of the company that does not involve the expropriation of shares (or valuable proprietary rights that attach to them) is valid unless: -         it is ultra vires; û       you can ignore this as the doctrine has been abrogated -         outside the objects of the company; ð     sometimes the constitution of the company will set out the objects of the company: this is increasingly rare and mainly a feature of older companies that are still governed by ‘articles of association’ -         or it is oppressive of the minority of shareholders b)      in the case of a change to the constitution of the company that involves the expropriation of shares (or valuable proprietary rights that attach to them) the onus is on the majority of shareholders to show that: -         the change was made for the proper purpose of securing the company from harm or protecting the company from a significant detriment û       securing administrative savings or tax advantages are not proper purposes (but see McHugh J’s dissent) ü      a proper purpose may be present because the shareholder whose shares are to be expropriated:          is in competition with the company; or          must be removed from the share register of the company if the company is to comply with laws and regulations Credit:ivythesis.typepad.com

Shareholders’ Remedies

Gambotto v WCP Ltd [1995] 13 ACSR 342: The High Court held alteration is valid only if the majority of shareholders prove it is; for a ...

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