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

Instructions:

The essay presents an analysis of the impacts of the joint business venture between Tesco and China Resources Enterprises. It presents an analysis of the possible results that Tesco shareholders should anticipate following the joint venture. The paper format is OSCOLA.

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Content:

Impacts Of Tesco And CRE Joint Venture On Shareholders
Name
University
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 p...
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