Could Burberry be the best dressed army?

"A business whose prospects remain strong should not sell itself cheaply"

Burberry is well known for its signature garment, the trench coat. Which just so happens to be considered as 'military wear'. Kind of ironic given that they may have to do battle to avoid being taken over by a mystery buyer!

A mystery buyer has built up a 5% stake in Burberry, causing the company to take action to defend against a potential takeover bid.  Under UK rule, once an investor's stake crosses over 5%, the company target company can ask for disclosure on the owner of that stake. However, the stake has since dropped to below the 5% threshold.

So, who could this mystery investor be? Reports seem to be conflicted on the exact nature of this investor. FT suspect it could be from a rival luxury brand, such as LVMH, or a private equity investor. In contrast, WSJ disagrees and believes it is unlikely that the bid would come from a European fashion brand, however does also suspect a private equity investor, or perhaps a sovereign fund. Personally, I agree with WSJ on this. I don't see why another luxury fashion brand would necessarily want or need to plan a takeover of Burberry. Yes, it is a very desirable brand, and maybe for a European company would be a good move into the UK. However, European companies, such as LVMH, are currently facing their own issues and do not have the funds available for an attempted takeover.

Burberry is highly focused on the Chinese market, making up 25% of its sales, as well as a further 10% in Hong Kong. However, spending on luxury items has dropped significantly in China recently, resulting in a drop in the Burberry share price. Could it be, then, that this mystery investor has seen their chance and taken it? With the share price taking a hit, why not invest in the company now at a lower cost? Seems like a logical plan to me. Maybe this investor thinks that they can improve the company and bring the share price back up. With this in mind, they invest in a large proportion of shares now, at a cheaper price, get the company back up to strength again and increase the share price, then you can sell the shares off at a higher price, making some good money on the investment. I know, easier said than done.

Alternatively, there could be a lesson in Portfolio Theory here, linking back to my first blog. Maybe if Burberry hadn't focused so much on the Chinese market and had ventured into other markets earlier on, they wouldn't have faced such a decline in share price based on the Chinese market. If the share price hadn't dropped significantly, maybe they wouldn't be facing a potential takeover bid now.

Another issue faced by Burberry is that Christopher Bailey acts as both CEO and Chief Designer of the company. This may leave Burberry looking vulnerable and as an easy target for a takeover. This may also raise suspicions as to whether the maximum value is being gained from the company. Again, maybe this investor believes there is more money to be extracted, thus increasing on their own investment. Data shows that since Mr Bailey took on his dual job role, the shares in Burberry have dropped 7.7%, compare this to LVMH which has increased 21% in the same time and you see the problem! It is believed that, should this be an activist investor, the first thing to be done would be cutting Mr Bailey's job in half. Hence his keen interest in stopping this takeover bid!

In my opinion, this mystery investor has taken some business initiative and bought a large volume of shares whilst they are at a low price. If this is a takeover attempt, they are more than likely to work to increase the share price, thus gaining on their investment.

Margin Call - What does it take to get a 7 figure bonus?

"Be first, be smarter, or cheat"

Margin Call is focussed around an investment bank and their impending financial meltdown. It is interesting to see how the different characters respond the news of the crisis, both those in senior positions and junior positions.


The film begins with the HR department conducting a mass layoff on their trading floor. Of those being laid off is Eric Dale, the head of risk management. Upon his departure he warns Peter Sullivan, a senior risk analyst, to "be careful" and to look at the project he is working on. This moment is referred back to numerous times throughout the film and is a pretty fundamental point of the film. What stood out for me about this moment was how Eric had tried to raise his point to his employer and senior members of staff; however they only seem concerned about getting him out of the building. In contrast, Peter immediately looked at Eric's project and realised what a dire situation the company is about to find itself in. That being that if the firm's assets decrease in value by 25%, the loss for the firm would be greater than its market capitalisation.

Was Peter's decision to look into Eric's project as a sign of loyalty to his manger and to see the project through? Or was it based more on the warning given, would that be to him or the firm as a whole? Either way, I'm pretty sure Peter just saved the firm! If the reason for his quick response was out of loyalty, this really highlights the importance of building good relationships between employees, especially managers and their subordinates. Without a strong relationship between the two, Peter may too have ignored Eric's request, then who knows what would have happened to the firm when it all fell apart!

Another point is would like to look into is the aspect of human nature in the decision making throughout the film. How big a role do emotions play in these? It is interesting again to see how each of the senior manager act under the immense pressure of the decision they are having to make. Ultimately, are they trying to do what is best for the company, looking after their own personal interest, or just wanting to get out of the situation as fast as possible? Personally, I do not think that the decisions made were anything to be made lightly. There would be no set right or wrong solution, you would end up upsetting someone, whichever choice was made. The best thing the firm could do was to limit their losses and try to save what they could of the company.

Something I found rather unrealistic was the speed and ease that the firm was able to sell of the toxic assets; then again this did have to fit into a 2 hour film. Looking at Fama (1970), in a semi-strong market, surely regulators would have spotted the flaw in the formula and stopped the assets being sold. Then again, this appears to be a reputable Wall Street firm, so who would suspect them of trying to pull a scam? Look at what Bernie Madoff pulled off!

Was the company wrong to sell of all their worthless assets? I would argue that from a business perspective not. They realised the flaw in the system and came up with a plan to save the company before it all went under. Sam Rogers is seen to be questioning this, stating that they are "selling something they know has no value". However, as John Tuld, arguably, correctly points out, they are still "selling to willing buyers at the current fair market price". Again, linking back to the Madoff scandal, if you have willing buyers, why not sell the assets? All the employees wanted to do was survive, be that the company survives and or they survive still with a job. This is human instinct, and relates largely back to the emotions at the foundations of these decisions.

Towards the end of the film, John Tuld is seen telling Sam Rogers that he plans to promote Peter Sullivan. Hardly surprising, given he just saved the entire company! However, I do have to question quite what position he is being promoted too. By the end of the film I wasn't too convinced how much longer the company would really be around!

The ultimate solution given in the film for the banks survival was to motivate everyone with a 7 figure bonus. It was simple, you get a 93% sale on your assets, you get a $1.4 million bonus. The question is, would you do something you knew was unethical to get a 7 figure bonus?

 

 

Dividend Policy or Dividend Puzzle?

In the words of Fischer Black (1976), "The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together." Considering that it is still not decided whether dividends add to, or destroy, company value, I would say that this statement is completely true. 

The main question within dividend policy is does paying dividends maximise shareholder wealth? Surely, the very basic and simplistic answer would be yes, it does. Paying dividends out to shareholders will give the shareholder more money, thus maximising shareholder wealth. However, it is not as simple as that and, as every company is different, it would be virtually impossible to give a generic answer and solutions to dividend policy. 

The main issue that companies face with regard to dividends is do they pay out (or repurchase shares) to shareholders, or do they invest this money in positive NPV projects. Which would be more beneficial to shareholders?

A large amount of research has been carried out into the attitudes of companies towards the payment of dividends, or re-investing in the company. It was commonly found that the tendency to pay dividends was lower in smaller companies, who perhaps were not yet profitable and were looking to grow and expand. Due to being a smaller company, the investment opportunities and possibilities for growth would be fairly high. My opinion on this is that these managers would be looking at the dividend puzzle with a longer term perspective and would have the attitude that in order to maximise shareholder wealth, they would have to become more competitive and profitable. In order to do this they would have to invest in positive NPV projects and reduce, or eliminate, the payment of dividends to shareholders. 

Alternatively, larger companies have been found to be more likely to pay higher dividends, rather than reinvesting the money within the company. I think the reason for this is that they have less room for growth than new, younger companies and so the best way to keep their shareholders happy is to pay the dividends directly to them. If there is not necessarily a want or a need for investment and growth, this would evidently be the optimal use of the excess earning. 

I am of the opinion that smaller companies should adopt the Residual Dividend Policy, as in order to bring in the best returns for shareholders and increase shareholder value, they will need to develop a strong base. Investing in positive NPV value projects would still increase the market value of the company to reflect the increase in future returns, as detailed by Modigliani and Miller (1961).

For larger firms, I believe that a manged dividend approach would work best. Being a larger company, they would be more susceptible to variances in earnings each year. Sometimes they would exceed expectations by a large amount, other times they could fall short. A managed dividends policy would ensure shareholders would receive a decent dividend each year, giving them peace of mind that they chose a solid investment. However, it should be noted that any reasonable investor would expect to see slight fluctuations in their dividend, both positively and negatively, due to inevitable changes in the market or should the company's position change over a longer period of time.

I think it can be said that there is no set dividend policy that companies should adopt. Each company should determine their own policy based on what is most optimal for them and their shareholders. The policy is most likely to change and evolve alongside the company, and it is important for both the company and shareholders that the money is invested in the best way to increase value for both of them.