Strategic Financial Management

UNIT-1 Q1. Define Strategic Financial Management. Explain the

nature of Strategic Financial Management.
Introduction: All organizations require financial management for its
successful operations. It contains components for the acquisition,
management, allocation and financing of resources for the successful growth
of an organisation. Every organisation should manage its finances effectively
to attain its mission and goals. Recently, the fields of strategic management
and financial management combined to evolve a new discipline namely
Strategic Financial Management. > Meaning: Strategic Financial
Management refers to the study of finance with a long-term perspective
which considers the strategic goals of the enterprise. Strategic Financial
management is a management approach which makes use of various
financial tools and techniques to come up with a strategic decision plan. >
Definition: The Chartered Institute of Management Accountants of UK
(CIMA) defines strategic financial management as "the identification of the
possible strategies capable of maximizing an organization's net present
value, the allocation of scarce capital resources between competing
opportunities and the implementation and monitoring of the chosen strategy
so as to achieve stated objectives.
Strategy+ Finance + Management Fundamentals of Business
Nature: i)It is concerned with the long-term management of funds with a
strategic perspective, ii)It aims at maximization of profit and wealth of the
concern, iii)It is both structured as well as flexible, iv) It promotes growth,
profitability and existence of the firm in the long run and maximizes
shareholder value, v) It is an evolving and continuous process that
constantly tries to adopt and revise strategies in order to achieve the
strategic financial objectives of the [Link])It involves an innovative, creative
and multidimensional approach for finding solutions to the problems, vii) It
helps to formulate appropriate strategies and facilitates constant monitoring
of action plans to match with the long-term objectives. viii) It makes use of
analytical financial techniques with qualitative and quantitative judgment on
factual information. ix) It is resulting oriented combining of resources,
especially financial and economic resources, x) Strategic financial
management offers a number of solutions while analyzing the problems in
the organizational context.

Q2. Discuss the scope of strategic financial management.

Scope: i) Strategic investment management decisions. >It involves
decisions related to the long-term benefits. Capital budgeting techniques are
available to analyze risk and return level, using a number of methods. ii)
Strategic financing management decisions.> It considers the amount of
funds required in the [Link] this how much debts and fixed sources of
funds arc to be considered. iii) Strategic liquidity management decisions. >
This decision is important as a firm must maintain cash reserves for future
and contingencies. If the liquidity is not there, then the firm may face
financial agony. iv) Strategic value creation of firm. > It enhances the market
status of the firm consistently well performing companies win the trust of
existing as well as potential stakeholders or investors. This increases the
worth of companies’ share in capital market. v) Strategic profitability
management. > A company cannot sustain in future unless and until
consisted adequate profits are planned and generated. The source of
revenue is pre-decided.
Importance: i) Helps in detecting the requirements of capital in
business: The first and foremost function of financial management is that it
initially estimates the finance needed for the smooth running and functioning
of the business. This is one of the primary duties of financial managers. The
finance requirements of every business will vary due to the size of the
operation, their profit target, and various other objectives and mission. ii)
Helps in deciding the composition of the capital structure: Once the
capital requirements of the business are calculated, now the next function
that needs to complete by the financial manager is deciding what type of
capital structure should be there. This basically involves the choice between
the short-term and long-term sources of funds and also takes into
consideration the cost involved in the raising of this finance. iii) Helps in
choosing right source of funds: As there is a different source of raising
funds are available in the market. This step simply aims at choosing the most
appropriate and accurate one. The common types of fundraising methods
are raising funds through issuing shares & debentures, loans from the
financial institution, or through the issuance of securities like bonds. iv)
Allocating and investing in finance raised: After raising the funds, they
are invested in various means that are revenue-generating and are also in
line with the objectives and goals of the business. v) Utilization of the
surplus amount: It is concerned with a decision regarding the profit
generated by the business and how it should be utilized and there are
basically two options available for this profit utilization that are either excess
profit should be used for distribution as a dividend or for the retained
earnings depending on the future of the company. vi) Managing cash
expenses: This simply means management of the cash so that neither of
the expenses goes out of the budget. It consists of various expenses where
cash payments are to be made like salaries and wages payments, and
expenses of water and electricity bills, and the amount required for the
purchase of the raw materials, etc. vii) Controlling: It is one of the
important function as it is the one which plays a very effective role in the
accomplishment of the goals and objectives of the business. It makes sure
that whether all the activities are going in accordance with the pre-decided
plans and if not, accurate control measures are taken.

[Link] the Success Factors of Strategic Financial Management.

Success Factors in Strategic Financial Management:
1. Financial Expertise: Successful strategic financial management requires
a strong foundation of financial expertise. Finance professionals who
understand financial statements, financial ratios, and financial analysis tools
are better equipped to make informed decisions. They can identify financial
risks, evaluate investment opportunities, and develop strategies that
optimize the organization's financial performance. 2. Strategic Alignment:
Strategic financial management is most effective when it is closely aligned
with the organization's strategic objectives. Financial plans and decisions
should support the organization's long-term goals and be Integrated into the
overall strategic planning process. This alignment ensures that financial
management decisions are consistent with the organization's mission and
vision, leading to better overall performance. [Link] Management:
Effective risk management is a critical success factor in strategic financial
management. Organizations must identify potential risks, such as market
fluctuations, regulatory changes, or operational issues, and develop
strategies to mitigate them. By proactively managing risks, organizations can
minimize negative impacts, protect their financial stability, and enhance
overall success. [Link]-making: The quality of decision-making plays a
significant role in the success of strategic financial management. Finance
professionals must have access to accurate and timely information, analyze
data objectively, and consider multiple perspectives before making
decisions. By using data-driven decision-making processes, organizations can
reduce the risk of biased or flawed decisions, leading to better financial
outcomes. 5. Communication and Collaboration: Successful strategic
financial management requires effective communication and collaboration
across different departments and stakeholders. Finance professionals should
work closely with operational managers, business unit leaders, and other key
stakeholders to understand their needs, align financial objectives with
business goals, and ensure that financial decisions are well-aligned and
supported. Constraints of Strategic Financial Management: 6. Limited
Resources: One of the primary constraints of strategic financial
management is the limited availability of resources. Organizations often face
constraints in terms of financial capital, human resources, and technological
capabilities. These limitations can hinder the ability to pursue certain
investment opportunities or implement strategies that could significantly
benefit the organization. [Link] and Complexity
The financial landscape is characterized by uncertainty and complexity, with
changes in. regulations, technological advancements, and market dynamics.
Finance professionals face challenges in predicting future trends, assessing
risk, and making decisions in an environment where information is constantly
evolving. This uncertainty can lead to hesitancy in making strategic financial
decisions, potentially constraining the organization's ability to adapt and
compete effectively. 8. Organizational Culture: Organizational culture can
have a significant impact on strategic financial management. A lack of
financial awareness or resistance to financial management practices among
non-financial managers can hinder the effectiveness of strategic financial
decisions. Additionally, a hierarchical organizational structure or a lack of
decision-making authority for finance professionals can restrict their ability to
make timely and effective financial decisions. [Link] Environment:
The regulatory environment for financial institutions is complex and ever-
changing, with numerous regulations and compliance requirements.
Compliance with these regulations can be time-consuming and costly,
requiring significant resources and attention from finance professionals. The
constraints imposed by regulatory requirements can limit the flexibility of
strategic financial management, as organizations must navigate a maze of
rules and restrictions. 10. Lack of Skilled Personnel: The shortage of
skilled finance professionals is a significant constraint in strategic financial
management. Organizations may face challenges in attracting and retaining
talented individuals with the necessary expertise in financial analysis, risk
management, and strategic planning. The lack of qualified personnel can
hinder the ability to make informed decisions, implement effective financial
strategies, and adapt to changing market conditions. Strategic financial
management plays a crucial role in the success of organizations by making
informed decisions about investments, financing options, and risk
management.

UNIT-2 Q1. Define Risk and Uncertainty. How are they different from
each other.
1) Meaning of Risk: Risk means the probability that the actual outcome of
an investment may be different from the desired outcome. In other words,
risk refers to the variability in returns from security. Basically, the investors
concentrate more on the actual outcome which is less than the expected
outcome. If the range of potential outcomes is wide then the risk will also be
high. > Risk emerges from many sources and among them, the three
important sources are business risk, interest rate risk and market risk. *Total
risk = Unique risk + Market risk* Unique risk is a part of total risk which
rises from some specific factors of the firm, such as labor strike,
development of new product or entry of new competitor. It is also called
diversifiable risk or unsystematic risk. Market risk is a part of total risk which
is related with economy-wide factors such as growth rate of GDP, money
supply, inflation rate and interest rate structure. It is also called systematic
risk or non-diversifiable risk. ii) Meaning of Uncertainty: Uncertainty
refers to a situation in which there is more than one possible outcome of a
business decision and where the probability of each specific outcome is
unknown or cannot be estimated accurately.
The following are the differences between risk and uncertainty:
S. Nature Risk Uncertainty
No
1 Meaning Risk is a situation in which Uncertainty is a situation in
probability of outcome is which probability of an
known to decision maker. outcome is not known to
decision maker.
2 Variability In case of risk, variability In case of uncertainty,
is less variability is more compared to
compared to uncertainty. risk.
3 Measurem Risk can be measured as Uncertainty cannot be
ent participants have measured as it deals with
experience in similar completely new events.
events.
4 Probabiliti In risk, decision makers In uncertainty, decision
es can assign probabilities to makers
the outcomes of an event. cannot assign probabilities
to
outcomes of an event.
5 Historical In risk, decision makers In uncertainty, decision
Data can utilize available makers
historical data. does not have historical
data.

Q2. A project with an initial cash outflow of Rs. 100 Lakhs is

expected to have cash flows of Rs. 65 Lakhs, Rs. 60 Lakhs, Rs. 55
Lakhs and Rs. 50 Lakhs over its life at the end of 1st, 2nd, 3rd and
4th year respectively. The cost of capital is 10%. If the certainty
equivalents of the cash flows are taken as 80%, 70%, 60% and 50%
respectively for 1 to 4 years, is it worthwhile to undertake the
project?

Calculation of certainty equivalent of cash flows.

I year - 65,00,000 x80/100=52,00,000; II year - 60,00,000 x70/100=
42,00,000; III year - 55,00,000 x60/100= 33,00,000; IV year - 50,00,000
x50/100= 25,00,000
Table: Year: 1,2,3,4 >> Cash flow: 52,00,000, 42,00,000, 33,00,000,
25,00,000
pvfactor@10%: 0.909, 0.826, 0.751, 0.683, PVCF: 47,26,800 >
34,69,200 > 24,78,300 > 17,07,500 = 1,23,81,800
NPV = Cash in flow - Cash out flow =12381800-10000000 =2381800
NPV is positive so project is selected.

[Link] is a sensitivity analysis? Explain its impact on project

investment decisions.
Meaning: Sensitivity analysis can help to mitigate the impact of influences,
depending upon the severity of damage occurring out of risks. To control the
influence the sensitivities are analyzed. Sensitivity analysis is made along
with uncertainty and probability analysis, to determine the extent of action
to be taken. The higher the sensitivity of influences on events, the higher the
risk and the damage. > Sensitivity analysis is the study of the key
assumptions or calculations on which a management decision is based to
predict alternative outcomes of that decision if different assumptions are
adopted. Sensitivity analysis is a modelling procedure used in forecasting
whereby changes are made in the estimates of the variables to establish
whether any will critically affect the outcome of the forecast. > It is a study
to determine the responsiveness of the conclusions of an analysis to changes
or errors in parameter values used in the analysis, seeks to test the
responsiveness of outcomes from decision models to different input values
and constraints as a basis for appraising the relative risk of alternative
courses of action. It is possible to use sensitivity analysis for helping to
determine the value of information in addition to its role in strategic decision
making. Sensitivity analysis seeks to determine the range of variations in the
coefficients over which the solution will remain optimal. > Sensitivity
analysis is used in determination of risk factors in capital budgeting
decisions. It aids in identifying the most sensitive factor, that may cause
error in estimation. Sensitivity analysis talks about the responsiveness of
each factor on the project's NPV or IRR.
Merits: Sensitivity analysis is a very famous method for evaluating risk. It
involves the following merits: 1. It represents how sensitive a project is
to fluctuations in values of fundamental variables. > 2. This method shows
how critical values like NPV may be controlled if any changes in some factor
occur. > 3. The sensitivity analysis is very attractive as it expresses the
issues same as project evaluator. Demerits: The demerits of sensitivity
analysis are, 1. It explains the impact of changes in some variables on NPV
but does not explain the probability of these changes. > 2. In sensitivity
analysis only one variable is modified at a time whereas in practice many
variables must be considered at the same time. > 3. The analysis is
subjective in nature where in decision of one person is different from the
other (one may accept while the other may reject a proposal).

Unit-3 Q1. Describe the project abandonment decisions.

Management of investment is a dynamic process which cannot be
maintained consistently during the whole life of the project, i.e., there exists
number of changes during the life of the project. These changes may lead to
changes in the attractiveness of the project in terms of cash flow, profit, and
relevance. Thus, it is necessary to periodically review the project during the
life of the project to update the capital budgeting decisions such as
continuation of the project or terminating the project or divestment of the
project.

A firm can make use of the techniques of new project analysis for the review
of existing project performance In order to supplement the capital budgeting
decisions. But the existing project somehow differs from the new project in
the following ways, i) The cash outflows of a new project results in relevant
cash flows whereas for existing projects the returns consider the sunk costs
which are irrelevant. ii)The cash flows of a new project are uncertain
whereas for existing project they are precise. iii)The discount rate of
existing projects should differ from that of new projects i.e., an appropriate
discount rate needs to be determined after estimating the incremental cash
flows of existing project based on which one can take the decision whether to
continue or abandon the project. Assume the life of the existing project 'X' is
7 years and it has been in use for the past 3 years.

Initial analysis of project (Estimated cash flows) X| Co C1 C2 C3 | C4

C5 C6 C7
Post analysis |A0 A1A2 A3 Actual cash flows | NC4 NC5 NC6 NC7
Future cash flows

The information that is necessary to take capital budgeting

decisions regarding existing projects include, Present value of
estimated cash flows in initial stages,
B
NC n
PVCF= ∑ n or (PV@ r%, n)]: B = Balance life of project| r =
n =1 (1+ r)
Appropriate discount rate.
iv) Salvage Value of Project: The expected amount that can be realized
by terminating the project is called salvage value.
v) Divestment Value (DV): The price of the project offered by the third
party to buy the project from the existing owner. The following relation helps
the manager to take appropriate decisions.
a) If PVCF > SV > DV, then the project can be continued, b) If PVCF > DV >
SV, then continue the project, c) If DV > SV > PVCF, then divest the project,
d) If DV > PVCF > SV, then divest the project, e) If SV > DV > PVCF then
terminate the project, f) If SV > PVCF > DV, then terminate the project.
 UNIT-3 [Link] briefly about Hertz simulation? Elaborate the
process of Hertz simulation.
Hertz introduced the use of simulation model for evaluating the risks
associated with investments by determining the expected rate of return and
standard deviation of investment. The procedure of Hertz simulation model
consists of,
Step 1: Hertz identified the important factors that are uncertain and has a
significant effect on the investment. He developed the probability
distribution for each factor based on the historical data assessment of the
outcomes or knowledge of the decision makers of the firm. The factors
include,
a) Market Analysis: the following factors should be considered while
analyzing the market,
i) Market size | ii) Selling price | iii) Growth rate | iv) Market share.
b) Investment Cost Analysis: The factors that should be considered for this
are,
i) Investment required | ii) Residual value of investment.
c) Operational and Fixed Costs: The firm needs to analyze the following
factors under this category,
i) Operational costs | ii) Fixed costs | iii) Useful life of facilities.
FLOWCHART: Start > Identify key factors and develop Probability
distribution for each factor >Generate a set of random numbers from each
probability distribution > Combine all the values to calculate NPV or rate of
returns > Repeat the process till obtaining high NPV > Determine the
probability distribution of NPV values > Assess the probability distribution of
NPV > Stop Fig.: Steps in Hertz Simulation Model
Step 2: Select a value for each factor randomly or develop a set of random
numbers of the distributed values of the factors in order to calculate rate of
return for each factor. Simulate these values to determine the rate of return
or NPV.
Step 3 : The process needs to be repeated for number of times to
determine the risks associated with the investment. It is necessary to restrict
the variations in the factors affecting the market while determining the
expected return from the simulated set of random numbers. Simulation of
the random numbers can also be done using computers which yield
favorable and adequate results. For every time, a set of values of each of
nine factors needs to be simulated to calculate the respective returns for
each factor. After conducting adequate trials of simulation, a firm can plot
the results on a graph to determine the rate of return and the frequency
distribution which helps in determining the probability of favorable returns of
investment under various degrees of risk. The list of the profitable
investments with less risks can be determined by comparing the frequency
distribution of the rates of return on investment. Simulation models are also
used for budgeting or profit planning. T models help in reducing the effect of
wide variability in different factors that affect the firm's profitability.
UNIT-3 [Link] NPV. Explain the merits and demerits of NPV.
Meaning: NPV can be defined as preset value of benefits minus preset
value of costs. It is the process of calculating present values of cash inflows
using cost of capital as an appropriate rate of discount and subtract present
value of cash outflows from the present value of cash inflow and find the net
present value, which may be positive or negative. It is also known as the
discounted benefit cost ratio method. Positive net present value occurs when
the present value of cash inflow is higher than the present value of cash
outflows and vice versa.
Steps involved in computation of NPV: i) Forecasting of cash inflows of
the investment project based on realistic assumptions, ii) Computation of
cost of capital, which is used as a discounting factor for conversion of future
cash inflows into present values, iii) Calculation of PV cash flows using cost
of capital as discounting rate, iv) Finding out NPV by subtracting PV of cash
outflows from PV of cash inflows.
Rule Decision: Acceptance or rejection of the rule of the project decides
based on the NPV. Accept: NPV> Zero || Reject:*NPV<Zero
Merits: The Merits of NPV are: i)It considers the time value of money. ii) It
uses all cash inflows occurring over the entire life period of the project,
including scrap value of the old project. iii)It is particularly useful for the
selection of mutually exclusive projects. iv)It takes into consideration the
changing discount rate. v) It is consistent with the objective of maximization
of shareholders' wealth.
Demerits: NPV is the most acceptable method when compared with the
traditional methods. However, it has certain Limitations. i) It is difficult to
understand when compared with PBP and ARR. ii)Calculation of required rate
or discounting factor or cost of capital (based on different methods) is
difficult, which involves a lengthy and time-consuming process. iii)In case of
projects involving different cash outlays, the NPV method may not give
dependable results. iv) It does not give satisfactory results when comparing
two projects with different life periods. Generally, a project having a shorter
economic life would be preferable, other things being equal.

Unit-4 [Link] briefly about Linter's Dividend Model.

Meaning: Lintner's Model was proposed by Professor John Lintner from
Harvard Business school after he interviewed 28 large firms. His study
proposed an organisation's current dividend on its current annual earnings
and previous year's dividends. In his proposal. || Lintner assumes that every
organisation has set dividend policies, and he also assumes that the
organisation wants to maintain a constant dividend rate. Lintner observed
that most organisations set target dividends to earnings ratios using the
present net value, and the earnings increases are not sustainable; thus,
changes in the dividend will occur when there is a sustainable increase in the
earnings. || The dividend is defined as dividing annual organisational
earnings among the shareholders. The common dividends distributed include
cash, stock and property. In a cooperative organisation, a dividend policy is
highly sensitive and complicated. Lintner's Dividend Model was developed to
explain the behavior of dividend policy. || The model addresses two main
determinants of dividend payout: recent earnings and previous dividends.
According to the model, if an organisation follows its target payout ratio, the
dividend will change whenever the earnings change. The dividend payout is
the current net income after tax and the lagged dividend (last year's
dividend). Lintner's Dividend Model uses the following formula -
D₁=a+b₁P + b2Dt-1 + Ut
Where: Dt represents the total equity dividend. ‘T’ represents time. || Dt-₁
is the sum of the equity dividend in a span 1-1 of t-1. || Pt is the current net
earnings after tax. || This represents an organisational ability to pay the
dividend to the stakeholders. || Ut is the error term. || Features: (i) Lintner's
Model assumes that the capital market is perfect in that all investors are
rational, information is freely available, and securities are infinitely divisible.
According to the model, every investor can influence the market prices of
securities, and there is no floatation cost. The tax rates applicable to capital
gains and dividends are not different. (ii) The assumptions of Lintner's Model
are unrealistic and unattainable. The approach used in the calculation of the
dividend payout is questionable on account of the capital market's
imperfections and the resolution of uncertainty.
Unit-4 Q3. Explain briefly about Modigliani-Miller approach.
Meaning: This theory states that dividend decisions will not have any
impact either on shareholder's wealth or share prices, as it is not related to
valuation of the firm. || According to this theory, investors don't separate
their dividends and capital gains. The main aim of investors is to yield more
returns in their investment. || In case, the company has profitable
investment opportunities, it will retain the earnings to finance them,
otherwise distribute them. The Modigilani -Miller Approach: The
Modigliani-Miller theorem forms the basis for modern thinking on capital
structure. The basic theorem states that, in the absence of taxes, bankruptcy
costs, and asymmetric information, and in an efficient market, the value of a
firm is unaffected by how that firm is financed. It does not matter if the firm's
capital is raised by issuing stock or selling debt. It does not matter what the
firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often
called the capital structure irrelevance principle. || They opine "under
conditions of perfect capital markets, rational investors, absence of tax
discrimination between dividend income and capital appreciation, given the
firm's investment policy its dividend policy may have no influence on the
market price of the shares. || They argued that whatever increase in
shareholders’ wealth results form dividend payment, will be exactly offset by
the effect of raising additional capital. For instance if a company having
investment opportunities can distribute all its earnings among the
shareholders. Then it will raise the capital required from outside. || This will
result in an increase in the number of shares, resulting in fall in the future
earning per share. So, whatever a shareholder has gained a result of
increased dividends may be neutralized completely on account of fall in the
value of shares due to decline in the expected earnings per share.
Assumptions: M.M. hypothesis is based on the following assumptions:
[Link] markets are perfect. The conditions are
(a) Investors behave rationally,
(b) Information is freely available to them
(c) There are no floatation and transaction costs.
[Link] are either no taxes or there are no differences in the tax rates
applicable to capital gains and dividends.
[Link] firm has a fixed investment policy.
[Link] or uncertainty does exist. Investors can forecast future prices and
dividends with certainty.
Determination of market price of the share: According to M.M.
hypothesis, the market value 3. of a share in the beginning of the period is
equal to the present value of dividends paid at the end of the period plus the
market price of the share at the end of the period. It is shown in the following
equation: P_{o} = (D_{1} + P_{1})/(1 + k_{e})
Where: Present market price of a share P_{0} = cost of equity capital ||
k_{e} = Dividend to be received at the end of period one || D_{1} = P_{1}
= Market price of a share at the end of period one. Computation of
number of new shares to be issued
According to M.M. hypothesis, the investment plan of a company can be
financed either by retained earnings or by issue of new shares or both. The
number of new shares to be issued can be determined by the following
formula: m*P_{1} = I_{1} - (X - n*D_{1})
Where, m = number of new shares to be issued || P_{1} = price at which
new issue is to be made || l_{1} = amount of investment required || X = net
profit during the period || n*D_{1} = Total dividends paid during the period
Criticisms: 1.M.M. hypothesis assumes that taxes do not exist, it is far
from reality,. In practical life not only the shareholders has to pay tax but
there are different rates of tax for capital gains and dividends. Capital gains
are subject to a lower rate of tax as compared to dividends. [Link]
costs: A firm has always to pay floatation costs in term of under writing fee
and brokers commission whenever it wants to raise funds from outside. As a
result of external financing is costlier than internal financing.
[Link] prefer current income than future income. M.M states that
both are equal. [Link] have informational content, it is not considered
by M.Μ.
 UNIT-5 Q1. [Link] a merger be considered a means of raising
additional equity capital? Explain.
(i) A merger happens when two companies combine to form a single entity.
(II) Public companies often merge with the declared goal of increasing
shareholder value, by gaining market share or from entering new business
segments.(iii) Unlike an acquisition, a merger can result in a brand-new
entity formed from the two merging firms.(iv) A merger typically combines
two companies of roughly equivalent size. The purchase of a company by a
larger entity is often called an acquisition.(v) Mergers often involve the
exchange of shares rather than cash consideration.(vi) For example, in
August 2017 Dow Chemical merged with polymers manufacturer DuPont to
form DowDuPont (DWDP) by exchanging Dow and DuPont shares for those in
the combined company.

[Link] diversification ? Explain different types of

diversification.
Meaning: Diversification is a business development strategy allowing a
company to enter additional lines of business that are different from the
current products, services and markets. || Diversification of business
activities brings competitive advantages, allowing companies to reduce
business risks. That is why it is a great tool for business development.
However, its successful implementation requires profound knowledge and
thorough preliminary assessment of the company and its environment. And,
although sometimes diversification is difficult for the small companies, it can
prove to be inevitable when their original markets become unviable.
Types: Diversification is a strategic approach adopting different forms.
Depending on the applied criteria, there are different classifications.
Depending on the direction of company diversification, the different types
are: [Link] Diversification: Acquiring or developing new products or
offering new services that could appeal to the company's current customer
groups. In this case the company relies on sales and technological relations
to the existing product lines. [Link] Diversification: Occurs when the
company goes back to the previous stages of its production cycle or moves
forward to subsequent stages of the same cycle - production of raw materials
or distribution of the final product. [Link] Diversification: Enlarging
the production portfolio by adding new products with the aim of fully utilizing
the potential of the existing technologies and marketing system. The
concentric diversification can be a lot more financially efficient as a strategy,
since the business may benefit from some synergies in this diversification
model. It may enforce some investments related to modernizing or
upgrading the existing processes or systems. [Link]
(conglomerate) diversification: Is moving to new products or services
that have no technological or commercial relation with cur-rent products,
equipment, distribution channels, but which may appeal to new groups of
customers. The major motive behind this kind of diversification is the high
return on investments in the new industry. [Link] Diversification:
Involves production of unrelated but profitable goods. It is often tied to large
investments where there may also be high returns.
[Link] examine the role of government in avoiding the
hostile takeovers
The salient features of some of the important guidelines are as follows:
[Link] of share acquisition/holding Any person who acquires 5%
or 10% or 14% shares or voting rights of the target company, should disclose
of his holdings at every stage to the target company and the Stock
Exchanges within 2 days of acquisition or receipt of intimation of allotment of
shares.
Any person who holds more than 15% but less than 75% shares or voting
rights of the target company, and who purchases or sells shares aggregating
to 2% or more shall within 2 days disclose such purchase or sale along with
the aggregate of his shareholding to the target company and the Stock
Exchanges. [Link] announcement and open offer: An acquirer who
holds 15% or more but less than 75% of shares or voting rights of a target
company, can acquire such additional shares as would entitle him to exercise
more than 5% of the voting rights in any financial year ending March 31 only
after making a public announcement to acquire at least an additional 20%
shares of target company from the shareholders through an open offer. (i)
Offer Price: The acquirer is required to ensure that all the relevant
parameters are taken into consideration while determining the offer price
and that justifying caution for the same is disclosed in the letter of offer. (ii)
Disclosure: The offer should disclose the detailed terms of the offer, identity
of the offeror, details of the of farer’s existing holdings offered in the offeree
company etc. and the in available should be made available to all the
shareholders at the same time and in the same manner. (iii) Offer
document: The offer document should contain the offer's financial
information, its intention to continue the offeree company's business and to
make major changes and long-term commercial justification for the offer. ||
The objectives of the Companies Act and the guidelines for takeover are to
ensure full disclosure of the mergers and takeovers and to protect the
interests of the shareholders, particularly the small shareholders. The main
thrust is that public authorities should be notified within two days.
[Link] procedures: The following is the summary of legal procedures for
merger or acquisition laid down in the Companies Act,1956: (i) Permission
for merger: Two or more companies can amalgamate only when
amalgamation is permitted under their memorandum of association: Also,
the acquiring company should have the permission in its object clause to
carry on the business of the acquired company. (ii) Information to the
stock exchange: The acquiring and the acquired companies should inform
the stock exchanges where they are listed about the merger. (iii) Approval
of board of directors: The boards of the directors of the individual
companies should approve the draft proposal for amalgamation and
authorize the managements of companies to further pursue the proposal.
(iv) Application in the high court: An application for approving the draft
amalgamation proposal duly approved by the board of directors of the
individual companies should be made to the High Court. The High Court
would convene a meeting of the shareholders and creditors to approve the
amalgamation proposal. The notice of the meeting should be sent to them at
least 21 days in advance. (v) Shareholders and creditors meetings: The
individual companies should hold separate meetings of their shareholders
and creditors to approve the amalgamation scheme. At least 75 per cent of
shareholders and creditors in separate meetings, voting in person or by
proxy, must accord their approval to the scheme. (vi) Sanction by the
high court: After the approval of shareholders and creditors, on the
petitions of the companies, the High Court will pass order sanctioning the
amalgamation scheme after it is satisfied that the scheme is fair and
reasonable. If it seems so, it can modify the scheme. The date of the court's
hearing will be published in two newspapers, and also, the Regional Director
of the Company Law Board will be intimated. (vii) Filing of the court
order: After the Court order, its certified true copies will be filed with the
Registrar of Companies.