Equifax Annual Report

FINANCIAL ACCOUNTING

GROUP ASSIGNMENT

GROUP MEMBERS:

1. ANUMITA GHOSH (M18)

1. CHARU JOSHI (M18)

1. IMANE ZOUEIN (M18)

QUESTIONS:

1. Using published academic papers, discuss acquisitions.

1. Download the annual report of a listed company from its corporate website. The annual report is a pdf document and may be found under the link ‘investor relations’ / ‘investors’. You may choose any year and any listed company. You are required to DESCRIBE the cash flow statement of the company for two consecutive years. You are NOT required to evaluate the cash flows; ONLY: (a) to identify the MAIN cash flows per category of cash flows, and (b) to compare them with the previous year. The objective of this question is to familiarize students with real cash flow statements and their structure.

              (N.B.: Kindly find question number II. On excel sheet attached with this file.)

INTRODUCTION

Most corporate organization are driven by a fundamental philosophy - to gain maximum profit to increase the wealth of the company and thus the wealth of the shareholder by increasing dividend per share. Corporation utilizes different methods, tools, and techniques to achieve maximum profits. With the advent of globalization, multiple firms are now operating in different markets across the globe.  Dangers of a disruptor entering the market and changing the market dynamics are always present. Traditionally organizations have responded to newer growth opportunities by entering new markets, launching new products, increasing their portfolio, and starting new business ventures.  For bigger companies with ready cash and a stable market valuation, this is easy but some small or mid-level organizations with less cash are forced to quit the market or being relegated to fringe players. In such cases, Merger and Acquisition (M&A) is the easiest and only options for them to survive. M&A is a business strategy enabling firms to consolidate their market position.

DEFINITION

Even though "Merger" and "Acquisition" are often used interchangeably, they are not the same terms. In "Acquisition" a financially sound firm buys some part or whole business of another firm. In "Merger" two or more firms come together to form a new firm. (Alao 2010). A lot of researchers has defined the term Merger but to summarise it in words of Durga, Rao, and Kumar (2013); Mergers and acquisitions are activities involving takeovers, corporate restructuring, or corporate control that changes the ownership structure of firms.

The principal objective of the firm behind entering into the deal of M&A is to combine forces with other companies that can be more beneficial than working alone. It is explicitly assumed that M&A decreases operating cost and increases ROE (return on equity)

MOTIVES FOR M&A

1) Synergy Motive: - Synergy is fundamental for the success of any merger. This is the most challenging element of M&A pricing strategy.  Synergy is accomplished when the value of the combination of the two firms is superior to the sum of the two stand-alone values (Jensen and Ruback 1983, Bradley 1988). The main benefits of achieving synergy are:-

a. Cost reduction

b. Revenue enhancement

c. Operation efficiency and resource optimisation

d. Achieving economy of scale

2) Agency Motive: -  Is concerned with the separation of interest between company owners and managers (Jenson and Meckling, 1976). Jenson (1986) pointed out that managers with a large cash to spare engage in their favourite business projects. Such managers also often make an unsuccessful and nonbeneficial acquisition.  Managers engage in such acts mainly because their annual salary, bonus, and compensation packages are connected to firm size, so the managers are motivated enough to increase the firm size. As paying cash to shareholders (in term of divided) lessens firm size and the control of the manager, managers tend to involve in negative NEP (Net Present Value) investments. Sometimes manager thinks that it is simply more esteemed to head huge organizations.

3) Managerial Overconfidence (Hubris Hypothesis):- Some if not all kind of M&A is driven by “Hubris”. Hubris is defined as excessive confidence or arrogance.  Hubris may be developed after a manager encounters a sustained period of success.  

Doukas and Petmezas, (2007) conjecture that managers with overconfidence and self-bias attribute their previous success to their own ability. Such managers carry out a worse M&A deal later

EXAMPLE OF SUCCESSFUL M&A

Arcelor Mittal S.A.

Predecessors: - Mittal Steel (India) and Arcelor S.A. (Luxembourg)