UK Starting Business

The takeover target saw that through a merger they could increase their capital base and thus their competitiveness for institutional business.

They were successful in accomplishing this as they were provided with the necessary equipment and sufficient financial freedom for the task. It is however over the preceding seven months where the advantages of having a parent company have really come to the fore.

In a time when revenues are low and are exceeded by overheads, financing is needed in order to carry the company through the bad period to when it can earn enough to cover its costs. This period, however, could be longer for the Canadian Bank1s securities arm than for many other firms due to its higher than average overheads.

The main problems created by the merger were those due to the different cultures of the stock broking and banking industries. In order for the amalgamation to have been successful, the new owners of the takeover target needed to have or acquire an adequate understanding of the stock broking business.

This understanding at least in part was lacking as seemingly only a very short term view was adopted by the parent. The present problems which were now being encountered by the firm hove largely resulted from this.

Very few predicted the October stock market crash but the majority of City Analysts agreed that the then buoyant conditions of the Big Bang period would come to a halt sooner or later as another recession came closer.

Thus long term investment planning was required in guiding expenditure through the predicted lean period of market inactivity. It is, therefore, perhaps questionable whether or not the parents fully comprehended the forthcoming problems which its subsidiary would face in inactive conditions or even in an average trading atmosphere.

As shown in the results, behavioural problems now exist with the company (caused as a direct result of the problems highlighted above). Many of the employees of the company, the dealers, researchers and analysts were unsure of their future with the company.

This insecurity does not result in avid concentration or motivation at work.

Through the great expenditure of the firm, cutbacks are now imminent and perhaps has resulted in distrust for the management or at the very least - a far from perfect working atmosphere.

An advantage gained from the merger was an increase in the company’s ability to compete (this does not necessarily mean at a profit). Having a large amount of financial backing is important when attempting to hold on or gain new institutional clients.

The equipment providing (although expensive) did enable the firm to execute its business efficiently which again is an advantage when seeking new clients. A different kind of efficiency, however, was absent due to the lack of volume business necessary to utilise all of the company’s resources.

The merger thus presented the company with problems and both are still present in its operation t the time of the interview. It could be argued that the advantages (the vast expenditure on equipment and facilities) are not so great when it is considered that the majority of stock broking offices have similar equipment (although perhaps not as extensive).

However, the cost of these overheads provides the company with a big disadvantage when profitability becomes the important criteria. It is reasonable to say that only two other broking firms have higher breakeven points than the company’s stock broking arm (who have the third largest dealing facilities in Europe).

If the argument is correct, the company will have marginal advantages in an active market situation but substantial disadvantages in slump conditions.

The results demonstrates the problems the company faces in an industry where demand is cyclical. The majority of the company’s costs are fixed (more so in the short term) and have greatly increased due to the conditions created by the Big Bang.

Its revenue, however, does not remain constant and fluctuates between the extremes of the Big Bang period and the present inactivity caused by the October crash.

The large fixed salaries and the expenditure, which occurred when trading revenues were sufficient, diminish only slightly when revenue is low. Thus, it would appear that the company has not taken due account of this fact and through its vast expenditure has created a situation where at present; only a substantial turnover will allow the company to be financially viable.

Where as before the company was concerned primarily with attracting new, mainly corporate investors in the present situation, in order to build up its revenue, the company needs its present investors to return to the stock market. Of course, this will not occur whilst a bear market is the prevailing economic force.

Building Society receipts rose soon after the crash suggesting that for many, the present stock market conditions are characterised only by a high risk - low return potential. It is hoped on the part of the stock broking industry that this period will not last for much longer.

Financial services range.
The range of financial services of the company expanded as a result of the merger. Whilst perhaps the dealing operations are at present in a state of docility, it may be likely that the banking and insurance operations are receiving steady revenues.

Perhaps the incomes generated from these activities are actually increasing due to the increases in investor’s deposable income (the income which would usually be invested in the stock market). If this was the case then the whole of the company’s operation would be a completely different scenario.

The author will now seek to ascertain the present positioning of the company looking both at the internal and external environments and the way in which the past and current events are affecting them.

The author believes that the results show the following points:

1. The induction of the quotation system.
It appears that the phasing in of the new dealing procedure was successful for the company. When the Big Bang arrived there were few problems as gradually more and more dealers began coming off the trading floor and on to the quotation system to conduct business.

One of the reasons for the success in implementing the change was perhaps because it was known by the dealing staff that the whole industry was undergoing the same changes and they were necessary to remain competitive (the quotation system is much faster and more efficient in executing transactions).

2. The costs/overheads of the company.
It seems that the company has substantial overheads perhaps too large for even average revenue to cover. The company has furnished itself with the third largest dealing room in Europe (perhaps in an effort to compete more effectively) which coupled with the large fixed salaries and the firm’s very expensive offices must without doubt leave the company with an above average break-even point.

3. The level of transactions.
Similar to most of London’s stock broking firms, the Canadian Bank’s securities arm have seen their number of transactions reach very high levels since the time of Big Bang and continue for a year until the stock market crash.

Negotiable commissions and the increase in the privatisations) as well as economic factors enabled turnover to grow to such a high level.

This level of activity was accommodated with the company’s extensive dealing facilities, but, of course, a large portion of this equipment became redundant when levels of turnover dropped considerably overnight, it was obvious that the present and future costs of the company would be more closely scrutinised.

Some overheads, however, would be difficult to reduce, for example the buildings.

4. The rates of commission.
The company’s minimum commission has risen to £40 (£20 previously) and represents a means for recovering the expenditure of the Big Bang. The reluctance of private investors to shop around for better deals has enabled the company to charge the same commission rates except for larger bargains where more attractive rates are levied.

Thus the company has developed a marketing policy of charging different categories of client the rate which he will bear without wanting to look for better deals elsewhere.

Whilst a fixed commission does exist, certain clients may be charged above or below this amount depending on their relationship with the firm or the individual investment manager. Regular customers may be more likely to receive lower commission rate than an occasional investor or someone who is a risky client.
In the institutional sector of the market where demand for corporate clients seems larger than the supply, net commission deals are not uncommon. In the short term the company hopes that these deals will attract institutional investors who will eventually pay commission on their large and frequent transaction.