Файл: Н.П. Морозова Limited Liability Companies in the ГюЛ. Mergers and Takeovers. Fundamentals of Entrepreneurship.pdf

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2. Read and translate the following international words:

innovative, capital, expansion, specific, date, periodically, fixed, reverse, dividend, guarantee, market, minimum, absorb, printing, finance, refinance, institution, bank, period, regular, basis, reinvest, balance, interest, convert

3. Read the text:

How Companies Raise Capital

The large company has grown to its present size in part because it has found innovative ways to raise new capital for further expansion. Five primary methods used by companies to raise new capital are:

Issuing bonds. A bond is a written promise to pay a specific amount of money at a certain date in the future or periodically over the course of a loan, during which time interest is paid at a fixed rate on specified dates. Should the holder of the bond wish to get back his money before the note is due, the bond may be sold to someone else. When the bond reaches “maturity”, the company promises to pay back the principal at its face value.

Bonds are desirable for the company because the interest rate is lower than in most other types of borrowing. Also, interest paid on bonds is a tax deductible business expense for the company. The disadvantage is that interest payments ordinarily are made on bonds even when no profits are earned. For this reason, a smaller company can seldom raise much capital by issuing bonds.

Sales of common stock. Holders of bonds have lent money to the company, but they have no voice in its affairs, nor do they share in profits or losses. Quite the reverse is true for what are known as “equity” investors who buy common stock. They own shares in the company and have certain legal rights including, in most cases, the right to vote for the board of directors who

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actually manage the company. But they receive no dividends until interest payments are made on outstanding bonds.

If a company’s financial health is good and its assets sufficient, it can create capital by voting to issue additional shares of common stock. For a large company, an investment banker agrees to guarantee the purchase of a new stock issue at a set price. If the market refuses to buy the issue at a minimum price, the banker will take them and absorb the loss. Like printing paper money, issuing too much stock diminishes the basic value of each share.

Issuing preferred stock. In addition to common stock some companies issue preferred stock. It gives its holders preference over common stockholders in the distribution of assets if the company goes bankrupt and payment of dividends. That is, if profits are limited, the owners of preferred stock will be paid dividends before those with common stock.

This type of stock is issued to attract buyers who want a regular but sure income and are willing to accept a lower rate of return to get it. Preferred stock is safer than common stock since it has a fixed dividend rate, and its market value doesn’t change as rapidly. But its holders don’t share in the operations of the company.

Preferred stock can be converted into common stock which allows holders to vote for the board of directors.

Borrowing. Companies can also raise short-term capital - usually working capital to finance inventories - in a variety of ways, such as by borrowing from lending institutions, primarily banks, insurance companies and savings-and-loan establishments. The borrower must pay the lender interest on the loan at a rate determined by competitive market forces. The rate of interest charged by a lender can be influenced by the amount of funds in the overall money supply available for loans. If money is scarce, interest rates will tend to rise because those seeking loans will be competing for funds. If plenty of money is available for loans, the rate will tend to move downward.

If the borrower finds that it needs to raise additional money, it can refinance an existing loan. In this transaction the lender is essentially lending more money to its debtor. But if interest rates have gone up during the period since the original loan was secured, borrowers pay a higher rate in order to hold additional funds. Even if the rate has gone down, the lender benefits by having increased the size of its original loan at a lower rate of interest.

Using profits. Some companies pay out most of their profits in the form of dividends to their stockholders. Investors buy into these companies because

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they want a high income on a regular basis. But some other companies, usually called “growth companies”, prefer to take most of their profits and reinvest them in research and expansion. Persons who own such stocks are content to accept a smaller dividend or none at all, if by rapid growth the shares increase in price. These persons prefer to take the risk of obtaining a “capital gain”, or rise in value of the stock, rather than be assured a steady dividend.

The typical company likes to keep a balance among these methods of raising money for expansion, frequently plowing back about half of the earnings into the business and paying out the other half as dividends. Unless some dividends are paid, investors may lose interest in the company.

4. Answer the following questions on the text:

I.1. What is a bond?

2.Can the holder of the bond get back his money before the note is due?

3.When does the company promise to pay back the principal at its face value?

4.Why are bonds desirable for the company?

5.What is the disadvantage of bonds for the company?

II. 1. What do equity investors’ rights in the company differ from those of bondholders?

2.When may holders of common stock receive dividends?

3.How else can a company create capital if its financial health is good and assets sufficient?

4.Does an investment banker agree to guarantee the purchase of a new stock issue at a set price?

5.What will happen if the market refuses to buy the issue at a minimum price?

6.What diminishes the basic value of each share?

III. 1. What privileges over common stockholders do the preferred stockholders have?

2.Why do companies issue preferred stock?

3.What is the difference between common stock and preferred stock?

4.What rights do preferred stockholders obtain if they convert their stock into common stock?

IV. 1. How can companies raise short-term capital?

2. What is the interest rate on the loan determined by?

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3.What can the rate of interest be influenced by?

4.How do interest rates depend on the overall money supply available for loans?

5.What can the borrower do if it needs to raise additional money?

6.Does the lender benefit if the rate has gone down?

V. 1. What do “growth companies” do with most of their profits?

2.Why do some people prefer the stocks of these companies?

5. Match each term on the left with its definition on the right:

6. Say which of the statements are true to the text. If not so, correct them:

1.Interest paid on bonds is not a tax deductible business expense for the company.

2.When the company doesn’t earn profit it makes no interest payments on bonds.

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3.Issuing bonds is a promising way of raising much capital for small companies.

4.Holders of bonds have no voice in the company’s affairs, nor do they share in profits or losses.

5.Holders of common stock have the right to vote for the board of directors.

6.If profits are limited the owners of preferred shares will receive dividends after those with common stock.

7.Since preferred stock has a fixed dividend rate it is safer than common stock.

8.Even if interest rates have gone up during the period since the original loan was secured, borrowers don’t have to pay a higher rate.

9.All companies pay out most of their profits in the form of dividends to their shareholders.

10.The typical company usually chooses only one of the above mentioned methods of raising money for expansion.

7. Prepare to talk about different ways of raising capital by companies:

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2. Read the international words and give their Russian equivalents: position v.; procedure; product; combine v.; portion; radical; project;

cooperative; association; consolidation; monopoly; monopolistic; idea; federal; technology; productive; baron; horizontal; vertical; combination; phase; industry; climate; critic; dominant; conglomerate; mania; leader; factor; political

3. Read the text:

Growing Larger, Growing Leaner

Corporations always try to position themselves to better compete. Mergers, takeovers, divestitures, joint ventures - firms use these and other procedures, usually to discard unrelated product lines1, to marry or buy up competitors and to rearrange finances in response to changing economic conditions including new and more formidable foreign competitors and in hopes of restoring growth and prosperity.

Businesses may combine or recombine in the following ways: (1) merger - two firms combine to create a new company and both the merging companies wish to join together, (2) acquisition - one company buys another company and remains the controlling firm (mergers and acquisitions can enable a company to gain access to new technology or enter new markets without incurring the costs, risks, and delays of starting from scratch), (3) divestiture - a company sells a portion of its business to another company,

(4) leveraged buyout - one or more individuals purchase a company with borrowed money, using the purchased company's assets to secure the loan, and

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(5) hostile takeover - one party fights to gain control of a company against the wishes of the present management.

The two basic ways that hostile takeovers occur are the tender offer (a raider offers to buy a certain number of shares at a price higher than the current stock price) and the proxy fight (the raider engages in a public relations battle for shareholder votes).

Two less radical ways in which companies are combined are the joint venture (two firms work together on a project) and the cooperative ( an association of people or small firms that join together to obtain greater bargaining power2 and to benefit from economies of scale3).

Many firms have tried to improve the competitiveness of their products through joint ventures with competitors. A joint venture between rivals does not involve a complete consolidation of their operations. Because joint ventures eliminate competition between firms in the field in which they decide to cooperate, it poses some problems of potential monopoly. But joint ventures also yield benefits. For example, when the Federal Trade Commission voted to allow General Motors(GM) and Toyota to carry out a joint venture, part of its reasoning rested on the idea that the joint venture would enable GM to observe and absorb Japanese manufacturing technology and therefore to become a stronger competitor.

Mergers are not new to the American business scene. Between 1881 and 1911, “robber barons” created huge monopolistic trusts. These trusts were horizontal mergers, or combinations of competing companies. Their aim was to achieve economies of scale and to prevent cutthroat competition. In the 1920s, a second wave of mergers occurred, this time in the form of vertical mergers. These mergers combined companies that were involved in different phases of a particular business of industry with the purpose of reducing costs and the threat of competition.

And again, in the late 1960s and early 1970s, another wave of mergers took place. This third wave consisted primarily of conglomerate mergers, in which companies acquired firms that operated in unrelated businesses. Management’s rationale when moving to diversify is that it is unwise to have “all its eggs in one basket”. If the demand for one product slackens, another line of business can provide balance. Over time, however, business leaders found that managing such diverse enterprises was often difficult, less