Daimler-Benz Chrysler merger takes the world one step closer to a global economy!

"Neither will survive alone, but it is a reluctant union!"

The Daimler-Benz merger with Chrysler is one of the most well-known international mergers in the world - not because it was successful, but because it failed as one company. What was the reason for this? The main one is that they ignored the cultural differences within the company which meant that there was no way it would work even if they managed to improve all other aspects. People have a large number of questions regarding this - why would they do it? What were they trying to achieve? How did they reach the $92bn figure as a settlement?

Let me start with the price. $92bn is a lot. It is the largest industrial merger in history and this deal rocked the markets! All the meetings were held in secret and in different locations. Only a limited number of people within the companies were even aware of it. In March 18, 1998, the price had to be determines. The CEOs met to discuss this. How many shares in Daimler Benz would be offered for one Chrysler share? Bob Eaton - the CEO of Chrysler - had a very specific ratio that he wanted to follow.He claimed that he wanted 28% more than what shareholders are worth because he could not sell the idea of a merger to the shareholders otherwise. By the end of the meeting, they came to the conclusion that the settlement would be at $92bn.

Mergers and acquisitions have started becoming more and more popular in the recent years. Why are people spending shareholder's money to buy another company? In my opinion, the main reason for this is synergies - if two companies are merging, the combined value should be greater than the sum of the two companies separately, otherwise I do not see the point for it. However, you cannot just join two companies together and expect everything to work efficiently without doing anything about it.

The structure of the company is most likely to change and this change should be made sooner than later. Employees should also be made aware of the possible changes as well. Although they declared that the Daimler Chrysler merger would be a merger of equals a lot of people were aware of the fact that there was no possibility of having two leaders. A lot of employees felt like it was a takeover rather than a merger so how was this an equal merger? Staff from Chrysler were worried because they were told that Eaton and Schrempp would be co-chairman for three years and then Eaton would retire. Even this plan failed because Eaton ended up leaving the company a year earlier than originally planned. 

"Mergers are never mergers! Either Eaton or Schrempp was going to be the leader!"

Another reason why companies might merge is to increase market power. With this merger, the company was exposed to both German and American markets and they could also save on tax purposes as well.An issue that occurred due to this was that people started referring to executives as German or American executives. This was wrong from the start. They should have been referred to as Daimler Chrysler executives. This would have shown the employees that they were serious about the merger and outsiders would have known that the company could also have global leadership in the car industry.

Culture played the biggest part in the failure of this merger. Employees were just put together but maybe team building exercises or such schemes should have been introduced to make the merger easier for them. Americans and Germans came from different cultural backgrounds so you cannot put them into one room and expect them to get along just like that. From personal experience, one culture would have to give things up at least partially to get along with the other.

Another issue that they had to face with wast that they were being excluded from the top S&P 500 American based companies in the Wall Street index because they were originally based in Germany. This resulted in investors pulling out overnight and stock fell by 10% and 8% respectively for Chrysler and Daimler Benz. This was not an issue which was discussed deeply but I believe that it should have been. It is impossible to be a German and an American company at the same time.

Most decisions were made in Germany and they had started to slowly take control of the company and employees and the Chrysler employees were aware that they would be facing a lot of changes after that.

It was a known fact for most people that although two men announced the news together to the press, only one of them would actually take the company into the 21st century. At the end of the day, I believe that if a company is in trouble, they should just find the best person to fix the problem - whether they are German, American or any other nationality, it really should not matter!

What do you think? Let me know in comments below!

Would you have paid $5.9bn to purchase Candy Crush?

"Mobile games have a lifespan that that a guinea pig would not envy!"

Mobile phone applications have become a big part of our lives. Other than the common social media applications such as Facebook, Twitter and Instagram, Candy Crush Saga is one of the biggest names in the App store. Introduced originally as a game for Facebook in 2012, it has now gone on to be one of the most popular games for smartphone users. How has it managed to stay popular for so long? I normally get bored of a game after one or two weeks of playing it which was why it came as a bit of a surprise for me when I learnt that Activision Blizzard paid $5.9bn for the owner of the game, especially since they have not been keen on the idea of mobile and social gaming. This leads to the question - how exactly did they decide that this figure was appropriate?

Activision Blizzard should have known how much King Digital Entertainment was worth before agreeing to pay nearly $6bn for them. There are certain factors that need to be taken into consideration before deciding on a purchase price. For instance, there are certain assets in a company which are difficult to assign a numerical value to. Another thing to consider is how efficient the market is - if the market is efficient it is safe to assume that the market share represents a true value of the company. However, a downside of this is that only about 3-5% of shares move everyday so it is actually a small part of shares that give an indicator of what the share price might be. All these factors are likely to have been considered before Activision Blizzard decided to buy King Digital Entertainment.

Why did Activision Blizzard decide to make this investment in the first place? Games normally have a short life span and Candy Crush Saga reached its optimum in 2012 and has been slowly declining since then. Within a few short years, I suspect that it is just going to be another game people used to play to pass time. According to the Financial Times, King had exceptionally good cash flow and they have started to diversify so although a large chunk of their revenue came from the increase of sales from Candy Crush ($250m to $324m) so this may have made them look more attractive to the buyers. Candy Crush is also a well known name which has the King logo on it so the purchase of the company would mean that the patent would appear on Activision Blizzard's balancing sheet, making their overall value higher. 

Activision Blizzard is known mostly for games such as Call of Duty, StarCraft and Warcraft. Personally I have never been a fan of these games, but I did play Candy Crush for a bit. Therefore, I think that these games are in completely different markets. Purchasing King was a very smart move by Activision Blizzard because it allowed them to go into the market and they immediately have access to a new customer base. It is also said to increase Activision Blizzard's earnings by about 30% next year so this is definitely a very good incentive for them to purchase the company.

I believe that pricing a company for a sale is a subjective matter so it is a difficult task. The value of King is said to be more than it's cash flow - and they generated $600m in cash alone last year. Considering that the deal was closed for $5.9bn, I would hope that this is true! Personally, I feel like the company has been overvalued and that Activision Blizzard should not have paid this much but then again, the purchase has given them a number of benefits such as a place in a whole new market so their potential number of customers would have increased vastly and a large potential increase in overall earnings.

That's my opinion anyway, what's yours? Let me know in the comments below!

Margin Call - Be first, be smart or cheat!

"It's just money; it's made up! Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat!"

What is Margin Call really about? Other than the good actors, chilling background music and extraordinary views of New York City, Margin Call tells a story about the volatility of trading prices and how a fire sale (when a firm sells everything at discounted prices when they are faced with large risks) works. The movie is about how efficient the market is and how people reacted to the potential changes in the prices.

It all starts with an equation - an equation that proved that the company followed the historical trends. This means that their market is following Fama's (1970) weak form efficiency where the current price reflects all the past movements. Was this a wise decision? Personally, I think they should have followed Fama's strong form efficiency theory where they considered all the available information in the market. One of the issues for them was that the volatility trends showed everything going downhill for the company at any minute. They would be faced with a projected loss greater than its market capitalisation if the firm's assets decreased by just 25% but is this a risk that the company was willing to take? What would be the outcomes for them if they ignored this prediction and just kept going on with their business as normal? The company chose to not ignore the prediction and get out of the trading business as soon as possible.

"If you're the first out of the door, that's not called panicking!"

The head of the firm, John Tuld decided to basically get rid of the balance sheet by 'selling something that has no value'. Technically, since they were just omitting part of the truth and not directly lying to their clients, John claimed that they were 'selling to willing buyers at the current fair market price so that we may survive'. Was this statement right? Was the price they were selling at really the current fair market price because as soon as they started selling everything, the prices would be all over the place?! There is this view but another way of looking at it would be that as the head of the firm, he was concerned with saving his own people before the crisis hit.

In the movie John Tuld claimed that the three ways to survive in the business was to be first, smarter or by cheating. The company's actions could be classified as being first or cheating. It is a matter of opinion. You could argue that they were the first to take actions in the market or it could be said that they were cheating because in the end, they were taking money off the people who did not know any better to save themselves in the crisis.

Their plan was to start selling as soon as the working day started but no employee was allowed to buy anything that day. Employees were promised a seven figure bonus as an incentive because some of them would have been reluctant to do this because they were putting their own careers at risk. The only issue was that they had to do this as quickly as possible. Once word got out, they were going to be making large amounts of losses - this is where they had to test the pricing efficiency in the market which is how quickly and rationally news in the market place is reacted to. This was a good theory for them to be using because as the day went on people started rejecting offers and the company was selling their assets at a much lower value than what it was worth - some of them making them a loss of millions of dollars. This was to be expected because different market participants got the news at different times of the day so they all reacted differently. For a market to be efficient, everyone would get the news at the same time but this was not the case.

A question left which is likely to be in everyone's mind after watching the movie is - "Do companies really work this way?" Surely insider information within the company can affect the way decisions are made - they may not always have the customers best interests at heart. A way to avoid this would be by considering Markowitz's portfolio theory and not investing everything you have with one firm.

Basically, do not put all your eggs into one basket! That's my opinion anyway, what's yours?

High dividends to shareholders or reinvesting profits - which is better?

If there are no attractive investments, should the company increase the dividends and give money to shareholders?

Since the beginning of 2014, the house building sector has grown significantly by about 60%. More people have been investing in this industry due to this. Most investors also received special dividends. This would have made the investors happy but was this really a wise move by the companies?

Extraordinary dividends can be declared every now and then but I believe a company should make sure that they are in a stable position first. Dividend policy aims to maximise shareholder wealth and are very important when it comes to communicating how the company is doing. If a company does not pay any dividends to shareholders, they might get the wrong message and think that the company is not doing well at all but it may just be that they are reinvesting the money. On the other hand, if companies continuously give shareholders high dividends, they might wonder why the company is not reinvesting their money at all - investment capability drives growth which would increase the share price.

Share prices have suffered recently and analysts have recommended that investors should not buy shares from the house building market right now. Current market conditions are claimed to be "too good to be true" so their valuations could suffer if the gross margins are affected negatively. Could the companies in this sector have avoided the unfavourable conditions they are faced with right now if they had not paid extraordinary dividends earlier? I believe that they could have saved their money then and just paid shareholders an average amount of dividend so that they could continue paying dividends with their retained earnings even when things are potentially going downhill for them. When it comes to paying dividends, it does not necessarily have to be on the current year's profits.

Let's consider what Modigliani and Miller's opinions are on this. We have to understand that they did not actually create the dividend irrelevance theory but just defined it. In 1961, they argued that the share prices were determined by future earning potential and not by the dividends paid now - share value is set by investment policy. They believe that if dividends are never paid, the company's shares are worthless but is this really true? What if the companies found a really good investment deal one year and decided to go with that option rather than giving their investors a high dividend? I believe that the right balance between paying dividends and reinvesting is very important. 

As always, Modigliani and Miller (1961) made some key assumptions with the biggest one being that there is no tax - however if you look at the political risks of dividend policies, the assumption there is that if a business is making an unusually large profit, the government would get involved and implement additional taxes. Therefore, can Modigliani and Miller's theory really be applied to real life? I don't think so! In fact, I don't think any one theory can explain whether companies should pay dividends or not.

Some analysts have argued that gross margins may rise next year before they start to decline again in the future. Updates about trading for house builders may look appealing, we have to remember that they are very vulnerable to change.

What is the best way for a company to react to profits? I believe it depends on whether the profits are low or high. Managers may try to maintain dividends by using retained earnings when profits are low - the aim is to send a signal to shareholders claiming that the drop is only temporary. On the other hand, if their profits are very high, directors of the companies may be more cautious about it and not declare a huge dividend because they may not be able to maintain the rate in the future and cuts in dividends could lead to shareholders being more uncertain about their investments.

What do you think is the best way for a company to react for fluctuations in profits? Let me know in the comments below.