Economy, modernization, nationalization, and globalization

Economy, modernization, nationalization, and globalization

Task 1

Economy, modernization, nationalization, and globalization, along with dramatic developments in information technology, have gained significant competition in all industries. Companies must boost their investment to sustain its competitive advantage. Investment managers must continue searching on basic accounting and expenditure decisions that will fulfill their objective of increasing the fortunes of shareholders as well as the value of the company (Kusuma, and Semuel, 2019). Profit therefore takes an indispensable role. Return on investment is the company’s chief financial motive, can be traced to two major routes: it is retained in the company for use in its growth prospects, or it is allocated to investors. It can be achieved in dividends or by buying back the circulating shares. Therefore, companies have to establish a dividend policy to dictate if and how to pay a dividend.

Dividend policy is essential for a company as it signifies power and contains data on the growth prospects of a company. Prospective investors and shareholders decide to invest in a business by researching its dividend payment ability. Besides, the dividend plan can be used to reduce the costs of the company. Because its shareholders ‘ prosperity can calculate management economic growth, administrators need to fully understand share price policy (Hooi et al., 2015). Occidental Petroleum has made a takeover of Anadarko Petroleum to beat the competition it has with Chevron, with an expectation of growth and a rise in the income of its stakeholders. In the acquisition process, an investment decision was made by Warren Buffet, founder of Berkshire Hathaway, who backed the offer. Berkshire Hathaway made a $10 billion commitment to help fund part of the $55 billion takeovers, hence adding on the number of shareholders. If Occident petroleum makes a profit, Berkshire Hathaway as a stakeholder will increase its wealth, as well as those of other investors and stakeholders.

Icahn was a staunch opponent of Occidental Petroleum’s move to purchase Anadarko Petroleum. A lengthy-time activist shareholder’s acquisition considered “highly overpriced” (Kusuma and Semuel, 2019). Costly funding, he as well as other stakeholders claimed, may put the Houston-stationed oil giant in great danger if crude prices dropped. Yet Icahn’s scruples about the agreement position him at variance with Warren Buffett, another prominent shareholder. The price seeker based in Omaha contributes $10 billion in funding to the Western proposal by Berkshire Hathaway, the portfolio firm of Warren Buffet. Warren Buffett earns 100,000 shares of regular perpetual preference equity with a price of $100,000 per capital and a cumulative dividend of 8% as a result of a contract with the administration of Occidental. Icahn looked at the contract and said that Buffett manipulated Hollub into a horrible deal.

Berkshire’s resource investment would render Occidental a more robust suitor. Occidental pursues Anadarko with an oil giant with significantly larger financial statements and whose market valuation is almost five times its worth. The intervention of Berkshire indicates that the company feels that Occidental is the highest placed to write worth from the investments of Anadarko. Throughout the Permian Basin, the U.S. oil shale area stretching along western Texas and southeast New Mexico, Occidental focuses on Anadarko’s land area. Occidental CEO Vicki Hollub presents Occidental as a high-performing Cretaceous drilling company capable of enriching investors of Anadarko by extracting additional petroleum from the reservoirs of the drilling rigs at lower prices (Michaely, and Qian, 2017).

Occidental / Anadarko acquisition made absolutely no sense to the company’s shareholders. Still, maybe it made sense to Vicki Hollub, the Chairman and CEO, and some members of the board who were suspected to be afraid that Occidental would be a buying opportunity and thus vastly overpaid to buy Anadarko to secure themselves and their positions ( Mo and Lee, 2019). The company’s intentions were particularly despicable as management consistently promised that they would not be involved in risky M&A and would preserve conservative assets and liabilities. Anadarko’s takeover by Occidental is nothing more than an enormous $55 billion leveraged gamble on oil prices, and the risk fails. Ironically, while Occidental has fallen by 42% from April, oil has fallen by only 12%. Wall Street could cause it has lost confidence in Hollub, and her committee and Hollub and her board may have placed their ambitions well above the best financial interest of the investors and shareholders of Occidental.

Once market participants have sowed a corporation, it is challenging to recover their trust. It is a tough position to be in, but Hollub and her board were, in the opinion, entirely predictable and pretty much self-inflicted. However, while Hollub and her board continue to pursue their careers and earn significantly very incredibly compensation payments, stockholders are experiencing severe obliteration of value and endanger much more of their investments. It is not known why Hollub, as well as its board, should commit a successful firm with a secure payout to a significant, highly risky transformation merger, where the threat is far higher than the incentive. Still, the danger may also lead to the end of the dividend payment of the organization. Since, under certain conditions, stakeholders and investors are actual owners of a company (Salman, A., 2019).

Task 2

The cost of capital is the minimum return rate to be received by a company before profit is generated. It should at least generate enough revenue to cover the value of the assets it uses to finance its activities before a company can make it again. Capital cost comprises of both the borrowing cost as well as the funding cost used to fund a company (Frank and Shen, 2016). The cost of capital of an organization depends heavily on the sort of funding that the company decides to consider. The business may focus on equity or debt alone, or use a mix of both. Companies will search for the best funding combination which provides sufficient financing and reduces capital expenditure. Therefore, stakeholders use capital costs as one of the quantitative indicators they regard when assessing organizations as prospective assets. The cost of capital is also relevant as it is used as the rate of interest for the surplus cash reserves of the organization.

Anadarko’s investors took over the Occidental bid that did not involve support from Occidental stakeholders due to Warren Buffett’s commitment. It was regarded as a desperate decision. The offer of $10 billion was not a better agreement. The sell-side advisory will walk away satisfied with capital that a deal’s quality is measured by the amount paid. With inventory, the package’s success or failure is far from certain. Since the transaction concluded the merged entity’s investments have dropped, serial investor Carl Icahn puts pressure on Occidental petroleum management to correct the downturn by speeding its interest in selling assets to minimize further the liabilities created by the Anadarko purchase. Financing choices make the price of equity an essential parameter for each business because it will evaluate the structure of the company’s capital (Li, 2015).

The expenditure in Berkshire, conditional on Occidental executing its prospective purchase of Anadarko, can also offset a few of the liabilities expected to fund the cash component of the transaction or cover the $10 billion profits from asset sales anticipated by Occidental within two years of the acquisition are ended. The approval of Buffett promotes the move of Occidental to make the deal, but it comes with a high expense. According to a declaration from Occidental, Warren Buffett will receive 100,000 preferred equity and an option to buy up to 80 million Occidental shares at $62.50 per capital in a secret deal (Baker and Wurgler, 2015). The preference shares would accumulate dividends at 8 percent per year, compared to around 5 percent interest on preferred shares as well as 4 percent on revolving equity. It has acted as the motivation for Warren Buffett to invest his $10 billion on the acquisition.

The view for occidental investors, for example, Carl Icahn, is that this is a relatively expensive investment funding expense, even if it brings some kind of engaging storyline to have Berkshire Hathaway involved in the possible investment. The decision favors Warren Buffett because apart from the debt financing, he also remains to be a stakeholder in the organization (Van De Coevering et al., 2019). Occidental petroleum is offering Berkshire Hathaway an option to purchase 80 million of its shares, making an excellent platform for Berkshire to invest more in increasing its wealth. Warren Buffett will not encounter any losses in the cause of receivership since he will have to be compensated before the rest of the stakeholders because he is the debt financer.

If a corporation collects funds from equity financing, the funding portion of the financial statement has a favorable element and also an improvement in the capital structure obligations. Debt funding requires the interest and principal that has to be returned to creditors. Although leverage does not water down equity, debt interest expenses minimize net cash flow and income (Florou and Kosi, 2015). The decrease in net earnings is indeed a tax advantage due to the reduced taxable revenue — rising debt results in an increase in debt levels like those of leverage-to-equity and liability-to-total assets. Debt financing also coincides with agreements, which means a business has to fulfill specific criteria for interest exposure and level of debt. In the case of a receivership of a corporation, equity holders are superior to shareholders.

Occidental petroleum made an investment decision of Berkshire Hathaway as the equity financer hence changing the capital structure of the organization. The change has caused a decrease in the net cash flow of the organization and the income. It is, therefore, affecting the dividends received by the stakeholders. The stakeholders of the organization will have to wait for the Berkshire Hathaway to be compensated in case of liquidation (Huang et al., 2016). It makes the change of capital structure not favorable for the stakeholders. The organization administration should have considered the stakeholder’s view when making such a rash decision since they are the most affected individuals.