Introduction
In 1987, the management of Swiss Bank Corporation (SBC) committed itself to a vision for the firm that became the foundation for a profound transformation of the bank; from a Swiss-focused commercial bank to a globally integrated financial service firm. The aim expressed in this vision included to become ranked among the best in its peer group, to increase shareholder value 10 percent per year, and to achieve premier credit ratings. Several acquisitions by SBC during the 1990s transformed the organization culturally, financially, and strategically. The merger in 1998 with Union Bank of Switzerland (ex-USB) was the culmination of SBC's strategic transformation process (Burner, 2000).
Corporate Finance
Modern companies need to raise finance from the capital market in order to invest in the real and intangible assets they need to earn profits. Their first priority is to ensure that they can source finance for both their short run and their long run needs in the most economical way possible. Corporate investment is by its nature risky and often capital intensive (Ryan, 2007).
In order to justify the use of other people's money a firm needs to ensure that the investment decisions it makes, taking into account its cost of capital, lead to an overall increase in the value of the firm and hence its investors' wealth. Alongside the problem of sourcing finance at the cheapest cost, the firm has to make sure that all the investment decisions it undertakes are 'value adding'. If they are not the firm will not be able to justify its existence for very long and will find itself out of business (Ryan, 2007).
The ability to trade the financial claims of business ventures has been known about and practised for centuries. In the modern era the standardization of financial claims into homogenous trading units has transformed the way markets operate. Until the 1930s companies, for example, borrowed money from banks - but following the Wall Street Crash in the United States there was a sudden loss of confidence in the banking sector. As a result, companies started to practise what governments had been doing for some time and sidestepped the banks going directly to lenders and offering them securitized debt in the form of bonds (Ryan, 2007).
Although modern financial intermediaries are marvel of efficiency, the role of traditional intermediaries such as banks as providers of debt capital to corporations has declined for decades. Instead, nonfinancial corporations have increasingly turned to capital markets for external financing, principally because the rapidly declining cost of information processing makes it much easier for large number of investors to obtain and evaluate financial data for thousands of potential corporate borrowers and issuers of common and preferred stock equity (Megginson and Smart, 2006).
The Five Basic Corporate Finance functions:
Although corporate finance is defined generally as the activities involved in managing cash flows (money) in a business environment, a more complete definition would emphasize that the practice of corporate finance involves five basic functions:
Raising capital to support companies operations and investment programs (the external financing function);
Selecting the best projects in which to invest firms resources, based on each projects perceived risk and expected return (the capital budgeting function);
Managing firms internal cash flows, its working capital, and its mix of debt and equity financing, both to maximize the value of firms debt and equity claims and to ensure that companies can pay off its obligations when due (the financial management function);
Developing company-wide ownership and corporate governance structures that force managers to behave ethically and make decisions that benefit shareholders (the corporate governance function); and
Managing firms exposures to all types of risk, both insurable and uninsurable, to maintain and optimal risk-return trade-off and therefore maximize shareholder value (the risk-management function).
(Source: Megginson and Smart, 2006)
External financing
When corporations are young and small, they usually must raise equity capital privately, either from friends and family, or from professional investors such as venture capitalists. These professionals specialize in making high-risk/high-return investments in rapidly growing entrepreneurial businesses. Once firms reach a certain size, they may decide to go public by conducting an initial public offering (IPO) of stock-selling shares to outside investors and listing the shares for trading on a stock exchange. After IPOs, companies have the option of raising cash by selling additional stock in the future (Megginson and Smart, 2006).
Capital Budgeting
The capital budgeting function represents firm's financial manager's single most important activity, for two reasons. First, managers evaluate very large investments in the capital budgeting process. Second, companies can prosper in a competitive economy only be seeking out the most promising new products, processes, and services to deliver to customers. Companies such as Intel, General Electric, Shell, Samsung, and Toyota regularly make huge capital outlays. The capital budgeting process breaks down into three steps:
Identifying potential investments;
Analysing the set of investment opportunities and identifying those that create shareholder value; and
Implementing and monitoring the investments
(Source: Megginson and Smart, 2006)
Risk Management
Historically, risk management has identified the unpredictable "act of nature" risks (fire, flood, collision, and other property damage) to which firms was exposed and has used insurance products or self-insurance to manage those exposures. Today's risk-management function identifies, measures, and manages many more types of risk exposures, including predictable business risks. These exposures include losses that could result from adverse interest rate movements, commodity price changes, and currency value fluctuations. The techniques for managing such risks are among the most sophisticated of all corporate finance practices. The risk-management task attempts to quantify the sources and magnitudes of firms risk exposure and to decide whether to simply accept these risks or to manage them (Megginson and Smart, 2006).
Corporate Governance
Recent corporate scandals-such as financial collapses at Enron, Arthur Andersen, WorldCom, and Parmalat-clearly show that establishing good corporate governance systems is paramount. Governance systems determine who benefits most from company activities; then they establish procedures to maximize firm value and to ensure that employees act ethically and responsibly. Good management does not develop in a vacuum. It results from corporate governance systems that hires and promotes qualified, honest people, and that motivate employees to achieve company goals through salary and other incentives (Megginson and Smart, 2006).
Developing corporate governance systems present quite a challenge in practice because conflicts inevitably arise among stockholders, managers, and other stakeholder's interests. But rarely is it in the interest of any individual stockholder to spend the time and money needed to ensure that managers act appropriately. If individual stockholders conducted this type of oversight, they would personally bear all the costs of monitoring management, but would share the benefits with all other shareholders. This is a classic example of the collective action problem that arises in most relationship between stockholders and managers (Megginson and Smart, 2006).
Bankruptcy and Corporate Financing Patterns
The more debt a firm uses in its capital structure, the less likely the firm will be able to meet its debt service obligations, and the more likely default will occur (Benning and Sarig, p.347). It is this default likelihood that introduces bankruptcy costs into capital structure. As argued by Van Horne (p.268), the presence of bankruptcy costs is an important source of imperfection in the markets for corporate funds. Under imperfect conditions, there are the administrative costs of bankruptcy, and assets may have to be liquidated at less than their economic values (Bekter, p. 56). It is also this tendency that Myers (p.218) describes as the direct cost of bankruptcy. The implication of the presence of bankruptcy cost in financial leverage is manifested more by the fact that debt-financing generates risks. Not only that, but it has been argued that for instance that every financing decision comes with some risk implications on the value of the firm (Glen and Pinto, 1994).
The largest bankruptcy in U.S. history was finally coming to an end. On April 20, 2004, MCI, Inc. Emerged with an announcement that it had begun distributing securities and cash to its creditors according to a court-approved reorganization plan. MCI's chief executive officer, Michael Capellas, heralded a new beginning for his company, which had filed for bankruptcy court protection twenty-one months earlier-when the company was called WorldCom-after disclosing and $11 billion accounting fraud. At the time of its Chapter 11 filing, WorldCom had assets totalling nearly $104 billion and debts of $32 billion (Megginson and Smart, 2006).
WorldCom shocked the business world when the company announced in June 2002 that it had fraudulently overstated $3.9 billion of expenses as capital expenditures, which had allowed it to book higher profits during the telecom boom years of 1998-2001. WorldCom chief financial officer Scott Sullivan was fired the day the accounting fraud was disclosed, and his exit followed that of founder and long-time CEO, Bernine Ebbers, who had been forced out in April 2002. Over the next two years, more than $7 billion in additional accounting errors and frauds were uncovered,, bringing the total misstatements to $11 billion, and in a March 2004 restatement of its 2001 and 2002 financial results, the company wrote off over $74 billion in previously booked profits and goodwill (Megginson and Smart, 2006).
Dealing with the Crisis
Corporate Control Transactions
Changes in corporate control occur through several mechanisms, most notably via acquisitions. An acquisition is the purchase of additional resources by a business enterprise. These resources may come from the purchase of new assets, the purchase of some of the assets of another company, or the purchase of another whole business entity, which is known as a merger. Merger is itself a general term applied to a transaction in which two or more business organizations combine into a single entity. Oftentimes, however, the term "merger" s reserved for a transaction in which one corporation takes over another upon the approval of both companies' boards of directors and shareholders after a friendly and mutually agreeable set of terms and conditions and a price are negotiated (Megginson and Smart, 2006).
Statuary Merger
A statutory merger is a form of target integration in which the acquirer can absorb the targets resources directly with no remaining trace of the target as a separate entity. Many intrastate bank mergers are of this form.
Subsidiary Merger
Conversely, an acquirer may wish to maintain the identity of the target as either a separate subsidiary or division. A subsidiary merger is often the integration vehicle when there is brand value in the name of the target, such as the case of PepsiCo's merger with Pizza Hut in 1997. Sometimes, separate "tracking" or "target" shares are issued in the subsidiary's name. Sometimes, these shares are issued as new common shares in exchange for the targets common shares, as occurred when General Motors issued new Class E and Class H shares to acquire, respectively, Electronic Data Systems and Hughes Electronics during the 1980's. Alternatively, a new class of preferred stock may be issued by the bidding firm to replace the common shares of the target as well (Megginson and Smart, 2006).
Consolidation
Consolidation is another integrative form used to effect a merger of two publicly traded companies. Under this form, both the acquirer and target disappear as separate corporations and combine to form an entirely new corporation with new common stock (Megginson and Smart, 2006).
Conclusion
The case study of Satyam Computers Limited (now MahindarSatyam) gives an opportunity to learn how a corporate company can face financial crisis, being one of the IT giants in India, Satyam had its brand name worldwide, it was unfortunate that the co-founder and chairman of the company misappropriated the public fund.
The intervention of the government was a good move in rescuing the employees and the stakeholders; it also gave an opportunity for Satyam to merge with Tech Mahindar, who is worldwide leader in IT.
