Н.П. Морозова Limited Liability Companies in the ГюЛ. Mergers and Takeovers. Fundamentals of Entrepreneurship

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IV term	- срок
short-term	-	краткосрочный
working capital	-	оборотный капитал
inventory	-	товарно-материальные запасы
money supply	- денежная масса
transaction	-	сделка syn. deal
V buy into	- закупать акции предприятия
capital gain	-	прирост капитала
plow back	- реинвестироватьприбыльвосновныефонды

2. Read and translate the following international words:

innovative, capital, expansion, specific, date, periodically, fixed, reverse, dividend, guarantee, market, minimum, absorb, printing, finance, refinance, institution, bank, period, regular, basis, reinvest, balance, interest, convert

3. Read the text:

How Companies Raise Capital

The large company has grown to its present size in part because it has found innovative ways to raise new capital for further expansion. Five primary methods used by companies to raise new capital are:

Issuing bonds. A bond is a written promise to pay a specific amount of money at a certain date in the future or periodically over the course of a loan, during which time interest is paid at a fixed rate on specified dates. Should the holder of the bond wish to get back his money before the note is due, the bond may be sold to someone else. When the bond reaches “maturity”, the company promises to pay back the principal at its face value.

Bonds are desirable for the company because the interest rate is lower than in most other types of borrowing. Also, interest paid on bonds is a tax deductible business expense for the company. The disadvantage is that interest payments ordinarily are made on bonds even when no profits are earned. For this reason, a smaller company can seldom raise much capital by issuing bonds.

Sales of common stock. Holders of bonds have lent money to the company, but they have no voice in its affairs, nor do they share in profits or losses. Quite the reverse is true for what are known as “equity” investors who buy common stock. They own shares in the company and have certain legal rights including, in most cases, the right to vote for the board of directors who

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actually manage the company. But they receive no dividends until interest payments are made on outstanding bonds.

If a company’s financial health is good and its assets sufficient, it can create capital by voting to issue additional shares of common stock. For a large company, an investment banker agrees to guarantee the purchase of a new stock issue at a set price. If the market refuses to buy the issue at a minimum price, the banker will take them and absorb the loss. Like printing paper money, issuing too much stock diminishes the basic value of each share.

Issuing preferred stock. In addition to common stock some companies issue preferred stock. It gives its holders preference over common stockholders in the distribution of assets if the company goes bankrupt and payment of dividends. That is, if profits are limited, the owners of preferred stock will be paid dividends before those with common stock.

This type of stock is issued to attract buyers who want a regular but sure income and are willing to accept a lower rate of return to get it. Preferred stock is safer than common stock since it has a fixed dividend rate, and its market value doesn’t change as rapidly. But its holders don’t share in the operations of the company.

Preferred stock can be converted into common stock which allows holders to vote for the board of directors.

Borrowing. Companies can also raise short-term capital - usually working capital to finance inventories - in a variety of ways, such as by borrowing from lending institutions, primarily banks, insurance companies and savings-and-loan establishments. The borrower must pay the lender interest on the loan at a rate determined by competitive market forces. The rate of interest charged by a lender can be influenced by the amount of funds in the overall money supply available for loans. If money is scarce, interest rates will tend to rise because those seeking loans will be competing for funds. If plenty of money is available for loans, the rate will tend to move downward.

If the borrower finds that it needs to raise additional money, it can refinance an existing loan. In this transaction the lender is essentially lending more money to its debtor. But if interest rates have gone up during the period since the original loan was secured, borrowers pay a higher rate in order to hold additional funds. Even if the rate has gone down, the lender benefits by having increased the size of its original loan at a lower rate of interest.

Using profits. Some companies pay out most of their profits in the form of dividends to their stockholders. Investors buy into these companies because

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they want a high income on a regular basis. But some other companies, usually called “growth companies”, prefer to take most of their profits and reinvest them in research and expansion. Persons who own such stocks are content to accept a smaller dividend or none at all, if by rapid growth the shares increase in price. These persons prefer to take the risk of obtaining a “capital gain”, or rise in value of the stock, rather than be assured a steady dividend.

The typical company likes to keep a balance among these methods of raising money for expansion, frequently plowing back about half of the earnings into the business and paying out the other half as dividends. Unless some dividends are paid, investors may lose interest in the company.

4. Answer the following questions on the text:

I.1. What is a bond?

2.Can the holder of the bond get back his money before the note is due?

3.When does the company promise to pay back the principal at its face value?

4.Why are bonds desirable for the company?

5.What is the disadvantage of bonds for the company?

II. 1. What do equity investors’ rights in the company differ from those of bondholders?

2.When may holders of common stock receive dividends?

3.How else can a company create capital if its financial health is good and assets sufficient?

4.Does an investment banker agree to guarantee the purchase of a new stock issue at a set price?

5.What will happen if the market refuses to buy the issue at a minimum price?

6.What diminishes the basic value of each share?

III. 1. What privileges over common stockholders do the preferred stockholders have?

2.Why do companies issue preferred stock?

3.What is the difference between common stock and preferred stock?

4.What rights do preferred stockholders obtain if they convert their stock into common stock?

IV. 1. How can companies raise short-term capital?

2. What is the interest rate on the loan determined by?

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3.What can the rate of interest be influenced by?

4.How do interest rates depend on the overall money supply available for loans?

5.What can the borrower do if it needs to raise additional money?

6.Does the lender benefit if the rate has gone down?

V. 1. What do “growth companies” do with most of their profits?

2.Why do some people prefer the stocks of these companies?

5. Match each term on the left with its definition on the right:

1.	Shareholders	a)	A paper in which a company promises to pay back
			with interest money that has been lent.
2.	Share	b)	A person, a bank, etc. giving someone money for a
			limited time.
3.	Common shares	c)	Money that has been lent.
4.	Preferred shares	d)	The people who own part of a company.
5.	Dividend	e)	A person, a company, etc. taking or receiving money
			for a certain time, intending to return it.
6.	Bond	f)	One of many portions into which a company’s
			capital is divided.
7.	Loan	g)	Shares which have a fixed rate of dividend.
8.	Interest	h)	A person, a company, etc. owing money.
9.	Profit	i)	That part of the money made by a business which is
			divided among those who own shares in the
			business.
10.	Loss	j)	Money paid for the use of money.
11.	Borrower	k)	Money gained by business.
12.	Lender	l)	The holders of these shares receive no dividends
			until interest payments are made on outstanding
			bonds.
13.	Debtor	m)	A failure to make a profit.

6. Say which of the statements are true to the text. If not so, correct them:

1.Interest paid on bonds is not a tax deductible business expense for the company.

2.When the company doesn’t earn profit it makes no interest payments on bonds.

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3.Issuing bonds is a promising way of raising much capital for small companies.

4.Holders of bonds have no voice in the company’s affairs, nor do they share in profits or losses.

5.Holders of common stock have the right to vote for the board of directors.

6.If profits are limited the owners of preferred shares will receive dividends after those with common stock.

7.Since preferred stock has a fixed dividend rate it is safer than common stock.

8.Even if interest rates have gone up during the period since the original loan was secured, borrowers don’t have to pay a higher rate.

9.All companies pay out most of their profits in the form of dividends to their shareholders.

10.The typical company usually chooses only one of the above mentioned methods of raising money for expansion.

7. Prepare to talk about different ways of raising capital by companies:

1. Issuing bonds				4. Borrowing
2. Sales of common stock				5. Using profits
3. Issuing preferred stock
	SECTION 2 MERGERS AND TAKEOVERS
				A
1. Words and expressions to be memorized:
merger			- слияние, объединение (предприятий, банков)
horizontal		merger	- горизонтальное объединение
vertical merger			- вертикальное объединение
takeover			- поглощение одной компании другой
hostile takeover			- акт враждебного поглощения / захвата
divestiture			- отторжение
joint venture			- совместное предприятие
acquisition			- приобретение; поглощение (фирм)
leveraged		buyout	-	приобретение контрольного пакета акций
(LBO)			(выкуп) с использованием кредита
tender offer			- предложение держателей акций одной компании
				о продаже акций другой компании в течение

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	определённого периода и при определённых
	условиях
raider	- лицо, скупающее акции с целью получения
	контрольного пакета, рейдер
proxy fight	- борьба за голоса (держателей акций), поданных
	по договоренности
to compete	- конкурировать
competitor	- конкурент
trust	- трест, концерн
conglomerate	- конгломерат, многопрофильная корпорация
conglomerate merger	- слияние разнородных предприятий
to diversify	- вкладывать капитал в разнообразные предприятия

2. Read the international words and give their Russian equivalents: position v.; procedure; product; combine v.; portion; radical; project;

cooperative; association; consolidation; monopoly; monopolistic; idea; federal; technology; productive; baron; horizontal; vertical; combination; phase; industry; climate; critic; dominant; conglomerate; mania; leader; factor; political

3. Read the text:

Growing Larger, Growing Leaner

Corporations always try to position themselves to better compete. Mergers, takeovers, divestitures, joint ventures - firms use these and other procedures, usually to discard unrelated product lines1, to marry or buy up competitors and to rearrange finances in response to changing economic conditions including new and more formidable foreign competitors and in hopes of restoring growth and prosperity.

Businesses may combine or recombine in the following ways: (1) merger - two firms combine to create a new company and both the merging companies wish to join together, (2) acquisition - one company buys another company and remains the controlling firm (mergers and acquisitions can enable a company to gain access to new technology or enter new markets without incurring the costs, risks, and delays of starting from scratch), (3) divestiture - a company sells a portion of its business to another company,

(4) leveraged buyout - one or more individuals purchase a company with borrowed money, using the purchased company's assets to secure the loan, and

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(5) hostile takeover - one party fights to gain control of a company against the wishes of the present management.

The two basic ways that hostile takeovers occur are the tender offer (a raider offers to buy a certain number of shares at a price higher than the current stock price) and the proxy fight (the raider engages in a public relations battle for shareholder votes).

Two less radical ways in which companies are combined are the joint venture (two firms work together on a project) and the cooperative ( an association of people or small firms that join together to obtain greater bargaining power2 and to benefit from economies of scale3).

Many firms have tried to improve the competitiveness of their products through joint ventures with competitors. A joint venture between rivals does not involve a complete consolidation of their operations. Because joint ventures eliminate competition between firms in the field in which they decide to cooperate, it poses some problems of potential monopoly. But joint ventures also yield benefits. For example, when the Federal Trade Commission voted to allow General Motors(GM) and Toyota to carry out a joint venture, part of its reasoning rested on the idea that the joint venture would enable GM to observe and absorb Japanese manufacturing technology and therefore to become a stronger competitor.

Mergers are not new to the American business scene. Between 1881 and 1911, “robber barons” created huge monopolistic trusts. These trusts were horizontal mergers, or combinations of competing companies. Their aim was to achieve economies of scale and to prevent cutthroat competition. In the 1920s, a second wave of mergers occurred, this time in the form of vertical mergers. These mergers combined companies that were involved in different phases of a particular business of industry with the purpose of reducing costs and the threat of competition.

And again, in the late 1960s and early 1970s, another wave of mergers took place. This third wave consisted primarily of conglomerate mergers, in which companies acquired firms that operated in unrelated businesses. Management’s rationale when moving to diversify is that it is unwise to have “all its eggs in one basket”. If the demand for one product slackens, another line of business can provide balance. Over time, however, business leaders found that managing such diverse enterprises was often difficult, less

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productive and less profitable than corporations with more narrowly defined product lines.

At the present time, a new round of business combinations is under way. This recent wave of merger mania has been the result of a number of factors, including (1) a desire to make operational improvements, (2) the profit potential of such deals (the leveraged buyout permits investors to make a big return on their investment, and foreign buyers are also seeking profits), and

(3) the current political and regulatory climate (e.g., the deregulation4 of certain industries and relaxed rules for trusts).

Some critics of the present merger wave believe that such deals are creating a huge burden of high - risk corporate debt that could ruin companies if the economy slips and profits decline. Proponents of such deals, though, argue that shareholders benefit from merger activities.

Despite all of the mergers and consolidations that have taken place in American business in recent years, the size of the average company has been declining. The reason is the huge number of new businesses formed each year, particularly those with fewer than 20 employees. Many fail especially in times of recession, but others take their place.

1. product line	Notes to the text:
	- номенклатура продукции, товарный ассортимент
2. bargaining power	- власть, позволяющая отстаивать свои интересы
3. economies of scale	- экономия, обусловленная ростом масштаба
4. deregulation	производства
	- уменьшение государственного вмешательства в
	экономику

4. Answer the following questions:

1.What are the aims of firms’ using mergers, takeovers, divestitures and other procedures?

2.What do we call the fusion of two companies into one when both companies wish to join together?

3.What can mergers and acquisitions enable a company to gain?

4.Does a hostile takeover occur against the wishes of one company?

5.What are the two basic ways of hostile takeovers?

6.At what price does a raider offer to buy shares?

7.What are two less radical ways of combining companies?

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8.What benefit did General Motors get from the joint venture with Toyota?

9.Are mergers new to the American business scene?

10.What was the purpose of horizontal mergers?

11.What companies did vertical mergers combine?

12.What are conglomerate mergers?

13.What is the recent wave of “merger mania” due to?

14.Do mergers produce more good than harm according to some critics?

15.Does the size of the average American company tend to increase or decrease?

5. For each word in A find the one in B which has the same meaning:

A

1) response; 2) to combine; 3) portion; 4) to gain; 5) to occur; 6) battle; 7) to improve; 8) rival; 9) to eliminate; 10) benefit; 11) therefore; 12) diverse; 13) huge; 14) to reduce; 15) to permit; 16) current; 17) relaxed; 18) regulation; 19) to decline

B

a) to allow; b) fight; c) answer; d) for that reason; e) to go down; f) to cut; g) part; h) competitor; i) of the present day; j) various; k) to join together; l) to become better; m) rule; n) profit; o) less severe; p) to obtain; q) very big; r) to take place; s) to remove

6. Match each term on the left with its definition on the right:

1.	Merger	a) An offer by one company to buy all or a great deal
		of another company’s stock at a higher price than the
		market price in order to gain control of that company
2.	Acquisition	b) An enterprise established by two or more
		companies to accomplish a specific task
3. Divestiture		c) A merger to guarantee a supplier or a customer to
		the acquiring firm
4.	Hostile takeover	d) The combining of two or more companies, usually
		to share costs, increase efficiency and avoid
		competition
5.	Tender offer	e) The purchase of one company by another company,
		with the purchasing company remaining dominant

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6.	Cooperative	f) The joining together of two corporations whose
	operations are unrelated.
7.	Joint venture	g) The buying of one company’s stock by another
	company with the intention of taking control of the
	board of directors and dismissing the existing
	management
8. Conglomerate mergers		h) The combining of two or more companies that
	produce similar goods or carry out the same stage of
	the production process
9.	Vertical merger	i) An association of people with similar products,
	services, or interests, formed to obtain greater
	bargaining power and other economies of scale
10. Horizontal merger		j) The selling of a portion of a business to another

business

B

1. Read the text and say what new facts you learned from it.

Mergers and Takeovers

There are several relationships that may grow up between businesses in Great Britain and the United States of America. The most popular are mergers and takeovers.

With a merger, two or more companies involved will consult with each other previously. They try to make a certain agreement on their merger to the satisfaction of both companies.

In a takeover one company buys a controlling interest in another company by acquiring at least 51% of its shares. The company does this by making a direct approach (обращаясь непосредственно) to the company’s shareholders for their shares. The company intending to take over will not necessarily consult the company it is taking over.

The Stock Exchange Council in London has drawn up a code of practice (Правила) to regulate takeovers to prevent some abuses (злоупотребления). One such abuse is secret dealing (действия) when a company wishes to take over secretly and buys its shares secretly. Another abuse is insider (лицо,

имеющее в силу служебного положения конфиденциальную информацию) dealing thanks to information used for personal profit.

While reading about mergers and takeovers we come across various terms. Some of them are as follows: