ACM is an integrated transportation broker of oil, providing carriage services for seaborne trade in petroleum products and crude oil. The company was found in 1982, and has a rich history regarding its reputation of being one of the prestigious and leading international tanker brokers. The company has gained a very high level of maturity over past 27 years in terms of market share, expansion and profitability. ACM is one of those few organizations which play a fundamental role in dealings of crude oil and petroleum related products all over the world. It is said to be indulged with those are involved in the buying, transporting or selling oil.
The company has been acting as the master of all for the global oil industry. The company acquired Seascope Co. in 2001 and later was fully merged with it in 2008. Similarly it acquired S&P desk from Seascope in 2002 with NASDAQ listed GFI Group. It launched it research services in oil industry in 2005. The second year following the previous, ACM also started its gas desk with the inauguration of Singapore office. ACM was later admitted to AIM, the global trade association for automatic identification, which was milestone in its ever increasing success. It expanded its operations with offices based in London, Singapore, India and China adding more to its prestige. The Company also started to deal in sale and purchase of ships from 2008 and onwards with the purchase of small/specialized tanker desk from H&D.
The well known, London Tanker Broker Panel and Worldscale Association London are the shareholder members of the company. ACM is a proud member of Baltic Exchange and Intertanko. ACM/GFI has the pride of being FSA (Financial Services Authority) approved (ACM, 2009)
The 2009 context
- Decline in revenue by 19% from US$24.4 million to US$19.8 million
- Pre-amortization and taxable profit of £3.3 million (2008: £3.4 million)
- Increased interim dividend by 10% from 2.5 p per share to 2.75p per share
- Adjusted earnings per share 13.1p (H1 2008: 14.0p)
- Forward orders booked for the year US$31.0million: Time charter US$23.6 million plus S&P US$7.4 million
- Ever strengthening cash position of £6.4 million at half year and nil debt (£4.9 million as at 31 March 2009)
- New international offices inaugurated in Moscow and Beijing as an addition to the existing offices in London, Singapore, Mumbai and Shanghai.
ACM has continued to be one of the most profitable firms of the wet tanker broking business. The Group had a good kick start to the year, despite falling freight levels from the exceptional high levels in the previous period. Although the revenue has dropped due to falling freight rates, ACM has still continued to gain increasing market. The other business divisions still continued to experience growth. We are confident that we will meet our expectations for the full year. During the year ACM emphasized upon the global wet tanker market .The world economy is recovering gradually from the recession and strong growths are being predicted for 2010. Strengthening of freight rates would be regarded as a golden cake for the firm. Medium and long term forecasts have demonstrated a continuous increase in the global demand for oil, particularly in the Far East. ACM now plans to enter into the dry bulk market but in a planned and measured way. For the entry into this market, ACM would be requiring some sources of finance.
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Sources of Finance
Companies are able to raise finance from a wide range of sources. It is useful to classify these into:
Money is raised from the business’s own assets or from profits left over in the business (ploughed-back profits)
Money rose from sources outside the business (Sloggett 1998).
Another classification is also often made, as was seen above, that of short-, medium, and long-term finance; this distinction is cleared by considering the figure below.
Internal Sources of Finance
Retained Profits If a company is trading profitably, some of these profits will be received by the government in the form of corporation tax and some is paid out to the shareholders as dividends. If any of the profit remains, it is retained in the business and becomes source of finance for future activities. For a company like ACM, with a retained earnings/profit figure of 8,219,000 pounds, funding expansion activities from retained profits seems a good idea. However, the relative pros and cons of each option would be discussed later on (Vaughan 1999).
Sale of Assets- Established companies often find that they have assets that are no longer fully employed (Banks 2006). These could be sold to raise cash. In addition, some businesses will sell assets that they might still intend to use but which they do not need to own. In such cases, assets might be sold to a leasing specialist and leased back by the company. In 1999, Somerfield, the grocery retail company, announced the sale of 50 of its stores to raise finance for investing in other areas of business. This is called sales and lease back. This option, however, does not seem much feasible for a company like ACM. Although the company is established since 1982, yet major expansions have been started as few as eight or nine years ago. However, due to the vast ownership of oil tankers, sea freights, transportation trucks, Lorries, and other such non-current assets, there definitely arrives a possibility of sale of assets. However, the sale would not be able to finance an over all expansion of the company (Arnold 2007).
Reductions in Working Capital
When businesses increase stock levels or sell goods on credit to customers (debtors) they use a source of finance (Stokes 1997). When companies reduce these assets by allowing a reduction in their working capital; capital is released which acts as a source of finance for other uses. There are risks with cutting down on working capital, however. Cutting back on current assets by selling stocks or reducing debts owed to the business may reduce the firm’s liquidity, i.e. the ability pay short term debts- to risky levels (Atrill 2008)
This option is absolutely not worthwhile for ACM to work upon, since working capital management would still forth, not reap any considerable amount of capital for the purpose of expansion activity (Atrill 2008).
Internal Sources - An Evaluation
This type of capital has no direct costs to business, although, if assets are leased back once sold, there will be leasing charges. Internal finance does not increase the debts or equity of the company. How ever, it is not available for every company. Solely depending on the internal sources of finance for expansion can slow down business growth as the pace of development will be limited by the annual profits or the value of assets to be sold (Vaughan 1999).
Thus, rapidly expanding companies are often dependant on external sources for much of their finance such as ACM.
Internal Sources of finance would prove to be insufficient and risky for ACM. At the fore most level, they would not prove to be enough for expansion. Secondly, obtaining finance internally would give rise to all sorts of threats and risks. Share price in the London Stock Exchange would fall, and company’s credibility in the eyes of financial institutions would become doubtful. Severe questions would arise as to in terms of liquidity (Atrill 2008).
External Sources of Finance
Short Term Sources
Bank Overdrafts: A bank overdraft is the most flexible of all sources of finance. This means that the amount raised can vary from day to day, depending on the particular needs of the business. The bank allows the business to ‘over draw’ its accounts by writing cheques to a greater value than the balance in the account (Cinnamon 2006). This over drawn amount should always be agreed in advance and always has a limit beyond which the firm can not go. Businesses may need to increase the overdraft for short periods of time if customers do not pay as quick as expected or if a large delivery of stock has to be paid for (Rutterford 2006). This form of finance often carried high interest charges. In addition, if a bank becomes concerned about the stability of one of its customers, it can call in the over draft and force the firm to pay it back. This, in extreme cases can lead to business failure (Arnold 2007).
Trade Credit by delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance. Its suppliers, or creditors are providing goods and services without receiving immediate payments and this is as good as lending money. The downside to these periods of credits is that they are not free. Discounts for quick payments and supplier confidence are often lost if the business takes too long to pay its suppliers (Vaughan 1999).
Debt Factoring - When a company sells goods on credit it creates a debtor. The longer the time allowed to this debtor to pay, the more the finance the business has to find to carry on trading. One option, of it s commercially unwise to insist on cash payments, is sell these debts to a debt factor. In this way immediate cash is obtained, not for the full amount of the debt. This is because the debt factoring firm’s profits are made by discounting the debts and not paying their full value. When full payment is received from the original customer, the debt factor makes a profit. Smaller firms, who sell goods on hire purchase often, sell the debt to credit loan firms, so that credit agreement is never with the firm but the specialist provider.
Medium Term Sources
Hire Purchase and leasing: These methods are often used to obtain fixed assets with a medium life span- one to five years (Weetman 2006). Hire purchase is a form of credit for purchasing an asset over a period of time. This avoids making large initial cash payments to but the asset (Atrill 2008).
Leasing involves a contract with the leasing or financing company, but no necessarily to purchase, assets over a medium term. A periodic payment is made over the life of agreement, but the business does not have to purchase the asset at the end. This agreement allows the firm to avoid cash purchase of the asset. The risk of unreliable or outdated equipment is reduced as the leasing company will repair and update as part of agreement. Neither hire purchase, nor leasing is a cheap option, but they do improve the short-term cash flow position of a company, compared to outright purchase of an asset for cash (Arnold 2007).
Long Term Finance
The two main choices here are
Debt: Long term loans from banks. These may be offered at either a variable or a fixed rate of interest. Fixed rates provide more certainty, but they can turn out to be expensive if the loan is agreed at a time of high interest rates. Companies borrowing from banks will often have to provide security or collateral for the loan; this means the right to sell an asset, if the company can not repay the debt, is given to the bank (Shapiro 2006).
Businesses with few assets to act as security may find it difficult to obtain loans-or may be asked to pay higher rates of interest. Alternatively, in the UK, a small business can apply to the Department of Trade and Industry for the loan to be part of the “guaranteed loan scheme.” Banks will be more willing to lend if a company has been successful in this application because it gives the bank security of repayment. Merchant banks are specialist lending institutions. They provide advice as well as finance to firms engaging in expansion or merger/takeover plans (Stopford 2009).
Debentures - A company wishing to raise funds will issue or sell these to interested investors. The company agrees to pay a fixed rat of interest each year for the life of the debenture which is often 25 years (Harwood 2008). The buyers may resell to other investors if the do not wish to wait until maturity before getting their original investment back. Debentures are often secured on a particular asset, which means that debenture holders have the right , if the company goes bankrupt to sell that particular asset and gain their payments. When this is part of agreement, the debentures are known as mortgage debentures. Debentures can be a very important source of finance. In the British telecom 1999 accounts, the total value of issued loan stock amounted to £3,000 million (Eiteman 2009).
Equity: Sale of Shares - All limited companies issue shares when first formed. The capital raised will be used to purchase essential assets. They are also able to further sell their chares up to the limit of their authorized share capital, in order to raise additional permanent finance. This capital never has to be repaid unless the company is completely wound up as a result of ceasing to trade (Stutely 2006).
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Private limited companies can sell further shares to existing share holders. This has the advantage of not changing the control or ownership of the company as long as all the shareholders buy shares in the same proportion as to those already owned. This can be done in two ways:
- Obtain a listing on the Alternative Investment Market (AIM) which is part of the Stock Exchange concerned with smaller companies that want to raise only limited amounts of additional capital. The strict requirements for a full Stock Exchange listings are relaxed
- Apply for full listing on the Stock Exchange by satisfying the criteria of (a) selling at least 50 000 pounds worth of shares and (b) having a satisfactory trading record to give investors some confidence in the security of their investment.. This sale of shares can be undertaken in two main ways:
Public issue by prospectus: this advertises the company and its share sale to the public and invites them to apply for the new shares. This is expensive as the prospectus has to be prepared and issued. The share issue is often underwritten or guaranteed by a merchant bank, which charges for its services (Mclaney 2009).
Arraigning a placing of shares with institutional investors without the expense of full public issue. Once a company has gained plc status, it is still possible for it to raise further capital by selling additional shares. This is often done by means of a rights issue. Existing shareholders are given right to buy additional shares at discounted price. By not introducing new shareholders, the ownership of the business does not change and the company raises its capital very cheaply (Vaughan 1999).
Debt vs. Equity-AMC
By now it is clear that none of the short and medium term sources of finance are suitable for AMC. Business expansion is a long-term investment, and long-term source of finance is required for the project (Damodaran 2009). However the question remains as to what should be chosen? Debt or Equity?
Debt financing has a number of advantages. As no shares are sold, the ownership of the company is not changed or diluted by the issue of additional shares. Loans will be repaid eventually so there is no permanent increase in the liabilities if the business (Brigham, Ehrhadt 2002). Similarly, lenders have no voting rights at the annual general meetings, hence they would not be able to influence upon decisions of the organizations in any way. Interest charges are an expense of the business and are paid out before corporation tax is deducted while dividends on shares have to be paid from profits after tax. The gearing of the company increases and this gives shareholders the chance of higher returns in the future (Arnold 2007).
Equity capital, on the other hand has its advantages too. It never has to be repaid, and is a permanent source of finance contrary to debt which is temporary and has to be paid. Dividends do not have to be paid every year by the company. If there is a loss, or insufficient funds, the company might not declare dividends at all. On the other hand, the debt has to be repaid even if the companies make a loss since it regarded as an expense rather than distribution of profits (Neale, Elroy 2004).
Strategic changes are, by their very nature, of long-term duration (Boakes 2008). Most changes to business strategy will require long time. ACM is going on with a major strategic decision for expansion of its activities. This does not mean that there will be no need for short term finance for example, if ACM wishes to expand towards East Asia and South Africa, there could a need to be new relations to be made up with local banks and to ask them to allow bank overdraft before newly established regions start t earn revenue. However, a compact business plan must be drawn over (Arnold 2007).
Summary and Recommendations
Equity financing, seems to me, the only one option for ACM, as it is indulged in a strategic change. Loan capital is another source of funds. In addition, internal long-term sources can be gained either by releasing finance tied up in current assets. This later objective could be achieved by ACM, by reducing dividends to ordinary share holders. The size and the profitability of the business are key considerations when ACM should make a financing choice (Vaughan 1999).
I personally recommend that ACM should opt for Equity Financing since it would be the best way to source out Finances. The world is already going through a recession and financial institutions are highly uncertain about debts. Although the recession has affected the individual investor as well, yet the recovery layer is starting from the Stock Exchange. The ACM would also receive support from the Government, since it would be in severe need of a golden ray amidst the recession. Share issues would enhance investor confidence and reap high profits for the organization. The share price of ACM would boost up and a high investor confidence would take place as suggested above. There is a chance that government might provide subsidies or tax exemptions for the expansion plan since it would definitely result in more employment and benefit for population.