Financial Ethics: OLYMPUS, The $1.7 Billion Fraud

In today’s world, we can found a lot of scandals and fraud on the news. What causes all this scandals and fraud occurred in the market? Is it because of greed of money or gain of the company value? When come to the ethical decision, I have always wondered how many decision maker will think ethically instead of its own gain. Today, I will talk about the topic of Olympus, $1.7 billion accounting fraud which is related to the financial ethics.

As you all know, Olympus is a large multinational corporation around the world. However, this scandal had made the Japanese people feel embarrassed about it. This scandal is found out by the first foreign leader, Michael Woodford during 2011. Woodford find suspicious that the money of 1.2 billion has disappeared in the account and he got fired after questioning this to Kikukawa. So, he started to investigate this mysterious payment. In this case, Tsuyoshi Kikukawa, Mori and Yamada are involved in this fraud by doing illegal practice of moving loss- making investments off shore. It sounds foolish that Kikukawa hide up 1.2 billion losses since he started working as CEO of Olympus instead of announce it to the public.  The total losses of 1.2 billion is cleared by acquired three defunct companies at a minimal valuation cost and sell them to Olympus at an inflated price of $550 million and Kikukawa contrives a new scheme paying on inflated fee to the financial advisers for Gyrus acquisition that cost $67 million. With all the losses that are cleared, Kikukawa thought he had buries this secret and Olympus could start again with a clean slate. Why Kikukawa decided to do that? Is it because the gain of the company in which the 1.2 billion losses will cause a decrease in share price or he is trying to protect the reputation of the company? However, what he did is an illegal practice and he had cause a bad reputation to the company. In 12 February 2012, Kikukawa and the members that participate in this fraud are arrested and punished.

After all, I doubt about how many people will act like a professional instead of employee when they come to the point of making decision for the company. How many of you will think of whether it is fair to the investors and how many of you will consider of what you might gain for making the decision? Please share your opinion with me.

 Much appreciated. 

Volkswagen's scandal: A grey November

After all the topics about M&A, dividend, CAPM, and stock efficiency, I decided to talk about business ethics which I think it is the most important topic in the financial market. There are a lot of successful smart leaders like Bill Gates, Mark Zuckerberg, Steve Jobs and more in the world, but they would not be so successful if they do not have business ethics in their mind. Business ethics is very important to a company because it will affect the reputation of the company which how the image is form in the public. It also builds trust with shareholder and stakeholders. If the reputation of the company is bad, it will definitely affect the value of the company and the shareholder and stakeholders will choose to bail out or sell off the shares because they do not trust the company.

I believe that everyone have heard of the recent news which talk about the Volkswagen’s scandal in the market. Since the beginning of November 2015, the bad news about Volkswagen does not stop. It is a grey November to Volkswagen due to the decrease of sales in Volkswagen. First, the company is found cheating by installing the software that was used to cheat on emissions tests. Volkswagen has also admitted that 11 million of its vehicles were equipped with software that was used to cheat on emissions tests which is kind of disappointed when I heard the news. After the scandal has been announced, Martin Winterkorn said that his company had broken the trust of their customers and the public. He decided to resign from the company and was replaced by Matthias Muller, the former boss of Porsche. However, it does not make any big changes to the company because the public does not trust the brand of Volkswagen anymore. As what I have mentioned, the reputation of a company is very important in the market. According to BBC news, the scandal has caused the Volkswagen sales fall 20% in the UK market. It may took a long time to build the trust between the customer and the company but the trust can be destroy in just a second if the company is found out doing illegal practice in the market. In addition, the Volkswagen scandal has affected the company’s debt downgraded as well.

 

After the scandal was found out in US, it has spread to countries like UK, Italy, France, South Korea, Canada and, of course, Germany, have opened investigations. Throughout the world, politicians, regulators and environmental groups are questioning the legitimacy of Volkswagen's emissions testing. Volkswagen respond that they will recall 8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the emissions scandal. Moreover, Volkswagen is one of the largest car maker in Germany and due to that it has also affect the car maker's shares fallen by about a third since the scandal broke.

After all, do you think it is worth to do illegal practice because the company wanted to earn more profit? This is the punishment that Volkswagen got after they were found cheating to pass the emission test. I am not sure how long will Volkswagen take to overcome this problem and to rebuild the trust of their customers. Do you agree with me that business ethics is so important to a company? Please leave some comment and share your opinion with me. 

Merger and Acquisition

In this day and age, mergers and acquisitions play an important role in corporate finance. For many companies, mergers and acquisitions are a source of external growth when primary growth is not possible, whereas to other companies they represent a constant threat to their continuing independent existence. Merge can be explained as a friendly negotiated deals between 2 organization into a new organization while acquisition means that a takeover of one company’s ordinary share capital by another company, financed by cash or issue shares. Why mergers and acquisition will occur in the financial world? It is because of synergy which the executives believe that the combined organization will have a greater value than the sum of its parts.

Here is the formula for synergy:

                 PV_AB = PV_A + PV_B + Gains

Today I will talk about the largest merger between Chrysler, a car industry from America and Daimler, another car industry from Germany which is happened in 1998. Chrysler is one of the car industries that have the 3^rd ranking in the United States car-maker. Besides, it is known for “block-buster” products because their best-selling vehicles are Minivan and Chrysler Jeep Grand Cherokee. Chrysler are risk takers in term of design, finance and manufacturing, it is quick and nimble where it can produce 2.2 million cars per year.  Meanwhile, Daimler- Benz is a car industry that produce high-end car in Germany which was very different from Chrysler. It has a strong historic roots and powerful heritage in the market. Daimler- Benz is a complex company structure with a holding company, a much diversified group including train; airline and car production and they are all run as autonomous business units which each have its own chairman and management board. Mercedes is one of the famous and profitable products around the world. Can this two large company that have big different succeed in the merging process? Well, not everyone will agree with merge and acquisition because they will afraid of losing their jobs and takeover by the stronger company. In this case, Daimler Benz is the powerhouse behind of the merger negotiation. Indeed, the board member of Chrysler will definitely worry about this merger process because it sounds like an acquisition instead of merge.

 However, the merge between these two companies was announced in 7 May 1998. In my point of view, I would say this merger as a vertical merger because the combination of two companies operates at different stages of production within same industry. It is because Jurgen Schrempp, CEO of Daimler Benz said no to platform sharing because this would be a merger without dilution of brands. After the merge, Daimler Chrysler started to face problems because there was confusion between merger management and operational management. Daimler Chrysler is excluded from the Standard & Poor 500 because the head-quartered is located in Germany. In this case, would Daimler Chrysler be a German company or American company? What about the conflicts of taxation and national pride for this company? Eventually, Daimler Chrysler did not perform well in the market where it did not make any profit for their first year and the new productions of Minivan from Chrysler were remaining unsold. At this point, Schrempp started to lose confident with Chrysler because he realized that Chrysler was losing control in the U.S market and the German management made a mistake of not taking this problem serious in the early time. However, Schremmp decided to take a drastic action by restructuring, downsizing and refocusing on Daimler Chrysler.

After all, I personally think that merger and acquisition between two companies may help them to expand their value of the organization. However, there are also a lot of limitations like culture, communication between employees, senior management were inaccessible that will cause the failure of M&A. Please drop some comment and tell me what you all think about merge and acquisition.

Cheers