In a recent letter from Yahoo’s Board of Directors to their Shareholders the Board addresses the concerns raised by the somewhat shady negotiations between Carl Icahn and Microsoft. Apparently Icahn is pushing for a deal that will not have shareholders interest in the forefront but more of a personal interest in a deal that would generate a fast return on investment for Icahn. After all, he has been known to be a person who looks for deals that could generate fast return on investment which everyone know do not come without high risks.
Icahn purchased his shares with yahoo at $25. 00 a share only two months ago and has become the driving force on the Microsoft deal ever since hence raising suspicions for everyone in Yahoo. The Board is also trying to explain to their shareholders that they have other deals on the table like a possible merger with Google which has the potential of increasing not only their share value but also create a positive cash flow for them as well.
In addition, they do not discard a deal with Microsoft however they want to take things to afford Microsoft some time to demonstrate their ability to remain competitive in today’s market based on recent facts that demonstrate a declining trend despite having invested millions in recent times. The Board proposal to Microsoft is a simple straight forward one: First Yahoo will sell to Microsoft only if they are willing to pay $33 per share and provides Yahoo with proof of their ability of closing the deal.
Second the Board will remain open to sell to Microsoft if they present an offer that would provide real value to the stockholders and resolves the substantial execution and operational risks associated with the sell. Taking things easy will ultimately ensure a deal that would benefit everyone while maintaining Yahoo’s well respected position in the internet world. Taking all precautionary measurements are the responsibility of the Board to their shareholders and will ensure a fair process eliminating a transaction that may be seeking to eliminate a competitor rather than expanding a business relationship.
The paralleled analysis of these six companies (American, Busch, Boeing, Coca-Cola, India Finance, and Yahoo) exhibits the necessity of mastering fundamental corporate finance concepts. Each of the selected companies has shown masterful processes in maximizing shareholder wealth, as well as displaying an innovative sense of growth. Following is a detailed analysis of specific core content areas which will relate to the class scenario of Lester Electronics. Analysis – Lester Electronics, Inc. The history of American Airlines shows us growth and profit maximization.
Since January 1930, when the corporation was formed, American Airline merged and formed alliances with different companies in order to stay competitive and to increase shareholders wealth. Merging with other companies allowed American Airlines to increase their market power as well as their stock value. At the same time, on September 20, 2006, the company had signed a 5-year service agreement with the U. S. Postal Service potentially worth $500 million in revenue to American, which is the largest single contract ever awarded to American’s Cargo division.
These actions are a result of American executive’s actions in order to increase company net present value and shareholder’s wealth. Lester Electronics can learn some important facts, in terms of mergers and increasing company value, from American Airline history. Since Avral Electronics has an interest in acquiring Lester and Transitional Electronics Corp has an interest in acquiring Shang-wa, Lester and Shang-wa can create a partnership to increase their market power and company value. At the same time Lester and Shang-wa, should look into new long term contracts to increase the net present value of the company.
This may not be enough to stop Avral and TEC from taking over Lester and Shang-wa but would at least increase, for the moment, the stock value and shareholder wealth. Likewise, as with Boeing, Lester can expand on their market share by developing new technologies as well. Currently, Lester stands to lose upwards of 45% revenue over five years if Shang-wa is acquired by another source. The level of dependency could spell doom for the company. Boeing remains profitable through its innovation and solvency. Lester has the potential of doing the same.
In the scenario, LEI and Shang-wa are faced with the tough decision of either sell to Transnational and Avral, or establish a partnership to keep their business rolling and to keep exclusivity to each other and maintain their position in their respective business markets. An example of what a firm deals with when selling its business can be clearly demonstrated with the case of Anheuser-Busch and InBev. Anheuser was purchased by InBev; but the new owner is faced with liquidation of assets in order to pay debt and increase cash flow (Foust, 2008).
The text states that a company can come up with different sources to come up with and use cash. “A decrease in networking capital or fixed assets leads to a decrease in cash, or an increase in long-term debt or equity can lead to an increase in cash” (Ross, Westerfield & Jaffe, 2005, Ch. 26). With the Anheuser-Busch case we can see how Brito uses financial leverage in order to invest in Anheuser-Busch as debt is an important form of financing and provides a significant tax advantage because interest payments are tax deductible, although this can cause some conflict between creditors and equity investors.
Creditors lean towards less risky ventures than equity investors” (Ross, Westerfield & Jaffe, 2005, Appx. 2A). In the case with Yahoo! we can observe the how shareholders can control managerial behavior. We can observe that Yahoo shareholders want to sell to Microsoft to get fast and good return. On the other hand, we can see how the executive board is trying to keep Yahoo in business and at the same time thinking about wealth maximization, by asking the shareholders to allow more time to the board, so that they can present a better wealth maximization plan, keeping in mind Yahoo’s reputation in the Internet business.
In Yahoo’s situation, although shareholders have in mind wealth maximization, their move can be observed as profit maximization than wealth maximization. Yahoo’s executive board is trying to act on the best interest of the shareholder, who have been “brainwashed by Carl Ichan, that selling to Microsoft in the best move” (Bostock & Yang, 2008).
In comparison to the scenario we can see that both LEI and Shang-wa and Yahoo and Microsoft, are dealing with the preassure of making the best decision in the best interest of the shareholders, that although, have similar ideas to wealth maximization, both companies are looking at different approaches on how to achive so. Yahoo’s shareholders are looking for themselves, but its executives are working in the best interest of the shareholders and the company.