Sample Finance Case Study on Tesco’s exit from the U.S. market

Merger, Takeover and Dividend Policy

Economic and Non-economic reasons for Tesco’s exit from the U.S. market

Tesco is among the largest retailers in the U.K.  It has used one of its expansion strategies of increasing sales hence optimizing on returns by opening Fresh & Easy chain in U.S in the year 2007. Fresh & Easy chain failed to carry out thorough market research when entering in the US, and therefore the management did not come up with decisions that would meet customer’s tastes and preferences in the United States. The Non-economic reasons behind Tesco’s exit from the U.S include the company’s failure to attach a brand name that would attract customers in U.S. The wide customer base market in the US is always keen on the Brand name, which Tesco’s retails did not consider as an important factor (Palmer, 2004).

Tesco Company in the US applied the strategies in U.K of targeting customers who were to purchase items when leaving from their places of work. Tesco Company established a food retail that would offer consumers in the country’s fastest growing states in the U.S already prepared and warm meals using small size retail shops. The Tesco Company failed to identify consumer’s behaviors in the U.S where the buyers carry out their shopping once after every week or are out for holidays and shop in a broader manner. This is contrary to Tesco company management’s expectations since in U.K, the company built different stores close to public transport links where large customer base grab few of their shopping on their way home from work in terms of ready meals. This idea did not materialize as a feasible business idea hence failed to translate well in the U.S economy. Though there were some shoppers who appreciated this concept of ready meals that was to be taken with minimal preparation or ready to eat, they were not enough buyers to sustain the retail in U.S expansion. The low potential market for ready meals reflected low potential sales resulting in high losses, which caused the Tesco Company to exit in the U.S economy (Lowe, & Wrigley, 2010).

Other economic reasons that necessitated Tesco’s company exits in U.S include economic downturn that resulted from subprime mortgage crisis of 2008 that affected the general economy worldwide, especially in U.S. In addition, subsequent recession, which ravaged most of locations where Tesco Company had established Fresh & Easy shops in U.S affected its sales adversely. It continued to make losses for years, which also contributed to its exit. This resulted from customer’s resistance to respond positively towards a new product.  Additionally, the exit would enable the Tesco company revive its U.K business, which was responsible for almost three quarters of its total revenue. It would also give a chance to the companies identifying Fresh & Easy chain as a potential target company to make takeover bids over the investments (Allen, Jacobs, & Strine 2002).

Question 2:  961 Words

Dividend Policy for General Motors Company (GM)

G.M Company had not paid dividend for a period of seven years from the year 2008 economic recession until the financial year 2014 where it paid a dividend of $ 1.20. This acted as a signaling of a comeback and confidence of GM Company in terms of future profits generations. Reintroduction of dividends to stockholders also enhanced confidence for both existing and prospective investors, which resulted in raising value of business firm in stock exchange market. In the first quarter of the FY 2015, GM company directors declared a $ 0.30 dividend per share. The average growth rate of General motor company’s DPS was 300% per year. Dividend payout ratio for the first quarter of FY 2015 was 0.54. During the last seven years from year 2008, General Motors Co has declared a highest dividend payout ratio of 5.00, the lowest being 0.37 and a median of 0.54 per year. In terms of earning per shares, which indicates the amount of earnings available for distribution among the outstanding shares of the GM company, common stocks indicates low earnings per shares having a diluted EPS of $ 0.56 for the FY 2015 and diluted EPS for the FY 2014 being $2.14. From year 2008 to 2015, the company EPS has indicated a decreasing growth in EPS of -7.80% having the lowest growth of up to a -78% per financial year (Fazakas, & Kosarka, 2008).

Impact of Vehicle Recall for GM Company

The impact of the General Motors Company recalling vehicles as a result of ignition problems was a decrease in company’s sales. This would lower amount of profits, which are distributable to company’s shareholders. The result would be lowering the company’s earnings per share for outstanding company’s common stocks holders and hence the amount of earnings to be distributed to shareholders as dividends. Low dividends to share holders indicates reduced growth in dividend per share, which would adversely affect the value of the company in the stock market as illustrated in the clientele dividend policy theory (Fazakas, & Kosarka, 2008).

Recalling of faulty motor vehicles and victims compensation would increase customer’s confidence with the company officials. By compensating victims of faulty motor vehicles, GM Company would fail to achieve its economic goal of wealth maximization and instead maximize on taking responsibility of the customers. This is a noneconomic goal but it would increase customer’s loyalty with the company and associate it with the desires of offering quality products to its customers. In economic terms, the company would register high cash out flow to cater for the recalling and compensation costs hence affecting the expected earnings of the firm (Zellweger, Nason, Nordqvist, & Brush, 2013).

 

Dividends policy theories relating to the GM Company recalling and compensation Fund

Clientele theory

Schools of thoughts and practitioners argue that some clients despite the tax disadvantages views dividends as favorable payments for their investments in the companies. Additionally, academics support case for payment of dividend to the stockholders arguing that they increase the Firm’s value. Investors who earn low incomes hence appearing in low tax bracket would prefer dividends as returns for their investments in the company. Contrary, investors who are at high tax bracket level would prefer low dividends payments or no dividends at all. If the GM Company would opt to stop paying dividends that had just been re-introduced, it might end up losing the clientele who prioritize on dividends payments. In contrast, investors who have low appetite on cash flow from payments of dividends would invest and increase in number in GM Company hence clustering the stockholders according to their preferences on investments.

Relevance Theory

Market prices of shares and distributable dividends to stockholders correlate. Different schools of thought argue about relevance of dividends in different views; some support relevance of dividends while others support irrelevance of dividends paid having no effect on the value of a firm. Scholars argue that investors in stock market would have a preference of current dividends as compared to potential dividends usually referred to as capital gains. Additionally, investors are risk averse and would prefer an investment that would lower their chances of risking to lose their funds. In case of GM Company, it is clear that the value of the firm rose from 40% to 41% after it declared dividends. If the company after compensating the victims of the faulty motor vehicles continues incurring high recalling costs, it might end up losing its profit lowering its dividend payout ratio and earnings distributed to the shareholders as dividends, which would result in low valuation of the company in stock market (Frankfurter, & Wood, 2002).

Signaling hypothesis

When a company makes an announcement regarding any change on its dividend policy to either pay or avoids payment of dividends, it conveys certain information to the market (Nizar Al-Malkawi, 2007). When a firm increases dividends to its shareholders, it indicates optimism and commitment to generate earnings that would enable payments of declared returns to investors. This being a positive signal increases investors’ confidence and leads to rise in stock price resulting in increased value of the firm. Contrary, decreasing or nonpayment of dividends reflects a negative signal, which is interpreted in the market as an indication of financial trouble in the long run and would result in drop in stock prices and hence the decrease in value of the company. In the events of GM Company, if the compensation cost rises to a great extent that would cause a decrease in the earnings, the resulting effects would be low or non payments of dividends to the shareholders hence a negative signal. Additionally, this would lower the value of GM Company in the long run, affecting its profitability adversely (Al-Malkawi, Rafferty, & Pillai, 2010).

 

References

Allen, W. T., Jacobs, J. B., & Strine Jr, L. E. (2002). The great takeover debate: A meditation on bridging the conceptual divide. The University of Chicago Law Review, 1067-1100.

Al-Malkawi, H. A. N., Rafferty, M., & Pillai, R. (2010). Dividend policy: A review of theories and empirical evidence. International Bulletin of Business Administration, 9(1), 171-200.

Fazakas, G., & Kosarka, J. (2008). Dividend policy theories. Kozgazdasagi Szemle (Economic Review), 9(55), 782-806.

Frankfurter, G. M., & Wood, B. G. (2002). Dividend policy theories and their empirical tests. International Review of Financial Analysis, 11(2), 111-138.

Lowe, M., & Wrigley, N. (2010). The “continuously morphing” retail TNC during market entry: Interpreting Tesco’s expansion into the United States. Economic Geography, 86(4), 381-408.

Nizar Al-Malkawi, H. A. (2007). Determinants of corporate dividend policy in Jordan: an application of the Tobit model. Journal of Economic and Administrative Sciences, 23(2), 44-70.

Palmer, M. (2004). International retail restructuring and divestment: the experience of Tesco. Journal of Marketing Management, 20(9-10), 1075-1105.

Zellweger, T. M., Nason, R. S., Nordqvist, M., & Brush, C. G. (2013). Why do family firms strive for nonfinancial goals? An organizational identity perspective. Entrepreneurship Theory and Practice, 37(2), 229-248.