Impacts Of Tesco And CRE Joint Venture On Shareholders (Essay Sample)

Impacts Of Tesco And CRE Joint Venture On Shareholders
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Impacts of Tesco and CRE Joint Venture on Shareholders
Abstract
Growing globalization has prompted the growth of a number of companies due to the fact that joint ventures, mergers and acquisitions have increasingly gained acceptance. However, it is notable that the results of such ventures are in some cases terrible. Economics analysts note that mergers are a result of egotistic and overzealous desires intent on realizing company goals Whereas joint ventures are expected to strengthen the capital base of a company, improve the profitability and also leverage a company in new and emerging markets, varying market and industry dynamics exemplify the need to critically analyze the effects of such business arrangements. For instance, it is apparent that certain companies opt to pursue this line of action after forecasting poor performance and possible bankruptcy. A probable example is apparent in Tesco and China Resources Enterprises. It is worth noting that the proposed joint venture has its innate weaknesses and benefits. On the contrary, the magnitude of the impacts varies significantly. The scope of the problems associated with any merger or acquisitions are notable in the effects on the economy and most importantly on the shareholders who are apparently not aware of the financial constraints a specific company may be facing. Considering the developments in the China and Tesco’s financial woes in the last few years, it is apparent that the joint venture is a way out for the ailing Tesco PLC. Given the fact that the company has in the recent past filed an application to have its long term revenue protected under Chapter 11, it is imperative that Tesco Plc Seeks working arrangements with established companies in target markets especially the new and emerging economies. Chinese and Hong Kong legal requirements stipulate stricter control measures on local and international companies seeking to operate in either mainland China or Hong Kong.
The recent development especially CRE’s declaration of interest to work with Tesco and most importantly toward the bid to take over ParknShop complicates the scenario in a number of ways. To begin with, Tesco is currently going through tough financial times which is attributed to the closure of it various outlets. Tesco PLC management is equally intent on adopting the strategy in Turkey if it is successful. Secondly, CRE seeks to salvage the local retail market using a potentially failed chain store. Thirdly, challenges the company is likely to face are inarguably many; among these, the memorandum of understanding signed between the two companies gives CRE a higher stake with 80% of the total company ownership. This has advantages and disadvantages to not only the domestic but also to the foreign shareholders. It is a fact that the inherent risks are significantly reduced given the China’s strict regulatory measures especially in the event of a merger or a takeover. According to the AML, in a scenario where a company is suspected of gun jumping, the AML is empowered to reverse and ultimately cancel any transaction. Tesco and ParknShop are considerably in the process of winding up their interests in different markets. Whereas Tesco PLC indicated in its press release that the Asian market is vital in increasing its revenue base, the company admits that sales in China have been falling in the recent past
Risks to Tesco PLC shareholders
Tesco is a leading entity in retail stores with a host of retail outlets in various countries. These are either jointly owned with local players or fully controlled. The level of growth in the businesses has brought forth problems and challenges due to varying business rules and regulations. Considering the events leading to the planned merger, it is observable that the main Tesco is seeking to protect its interests in larger China. On the contrary, the provisions of the agreement are questionable. To begin with, Tesco shareholders are not allowed to determine any clauses pertaining to the terms of commitment. This gives room for manipulation and relegates the shareholders to associates with minimal bargaining powers. The Chinese AML laws stipulate that a merger notification be filed if the turnover of a joint venture exceeds a certain threshold, in this provision, the turnover in a fiscal year should exceed $62 million. This is an indication that CRE will determine the process and timing of the merger. In a related scenario, the nature of the memorandum of understanding (MOU) between the two companies does not protect shareholders. The document reads in part that “Shareholders of the Company and potential investors should note that the MOU only sets out the understanding for the possible establishment of the Joint Venture, and that the MOU is not legally binding save and except for the exclusivity and confidentiality arrangements afore-mentioned”. It is imperative to note that the outcomes of further discussion between the two parties shall determine the nature of operations and the ultimate relationship regarding Tesco’s stake in the venture. China Resources Vanguard has the possibility of changing terms and conditions thereby compromising Tesco.
The provisions of the MOU are further subject to China’s local industry protection laws. Moreover, it is possible to suggest that CRE seeks to monopolize the retail market. This is seen in its interest to own ParknShop which is also a major player in the retail business. However, the company does not intend to approach this alone and would rather capitalize on Tesco’s financial ability and expertise in convenience store management. In the arrangement, Tesco is expected to issue all of its share capital to Gain Land as part of the procedure. Additionally, the company gains a 20% share capital in the whole arrangement. It should be noted that the 20% share ownership will influence Tesco’s annual returns in the entire Asian region. In the past financial year, the company’s overall earnings from Asia were worth £314million before the company signed the MOU with CRE. This is equated to a 7.4% growth. With this in mind, it is possible to suggest that the joint venture will influence the earnings of the company especially in low dividends and slowed growth. According to a recent statement, Tesco reports that it has improved recently and adopted a strategic growth plan aimed at further increasing the total worth and earnings of the company in non performing markets. The impacts of the joint venture will mean slow decision making processes. Additionally, political constraints and varying market dynamics will reduce the profitability of the company. It is notable the inherent risks the joint venture poses to Tesco PLC shareholders are mainly identifiable in the potential loss of shareholders power to determine the operations of the company because Tesco and CRE do not 50/50 ownership rights. This grants CRE executive authority over Tesco. Consequently, CRE can hold its earnings to offset other acquisition interests. In order to streamline the financial operations, the China Resources Enterprise and the majority holders in the joint venture can pre-empt dividends given to shareholders. China’s growth as an emerging economic power house in the Asian continent has attracted a number of international corporations seeking to explore the large market. The shareholders in the United Kingdom and Euro zone will realize low returns on share earnings due to Yuan exchange rates. For instance, in the 2013-2014 fiscal year, the difference in Tesco’s earning declined to 7.4% from 12.2%. Announcing the results for the 2013-2014 financial year, the company hinted that it has achieved remarkable gains following the implementation of its strategic plan. Given the potential success in European markets which were considerably similar to the Asian market, the joint venture in China will stall overall company progress and global market presence.
Benefits of the Joint Venture
Companies opt for joint ventures and mergers in order to achieve a number of goals. Among these, the fundamental aim is to cut costs and consequently increase the profitability of the company. In the process, a company adopts strategic plans to enable the smooth transition of operations. Different countries have varied laws that transcend not only the protection of domestic companies but also ensuring fair competition. In free market economies, global business environments determine the benefits a company is apt to realize. The overall performance of target country economy and that of the affiliate companies are elemental and should be considered before signing a joint venture agreement. A critical survey of the market potential reveals the potential of the company gaining significantly from the merger. According to international business analysts, the profitability of a business in foreign markets is influenced by the traditions of the population especially purchasing trends, nationalist attitudes and the presence of competitors and alternative products.
CRV is arguably the dominant player in China’s hypermarket industry. Whereas other international corporations such as Wal mart are present in the industry, CRV appointees in the boards are many. It is notable that out of close to 3000 stores in China, Tesco owns 131, merging with CRV will add value to Tesco’s business portfolio. The efficiency of operations, increased market share and diversified economies of scale are important aspects of survival in the present competitive global market. The joint venture between the two companies will ensure this. It is noted that that the UK chain store has witnessed stiff competition from regional rivals namely Sun Art. This has slowed the company economy a fac...