EMI Corporate Finance Case Study

EMI Case StudyINDIVIDUAL ANALYSIS

KENDRICK SHU – MBA BAYSWATER

Porter’s 5 ForcesEMI Group

1. Threat of New Entrants 

2. Threat of Substitutes 

 3. Supplier Power 4. Buyer Power 

 5. Rivalry

Low. Traditional music companies in the publishing and recording space are losing relevance. High. Other mediums like digital downloads and internet streaming vie for customer attention. Higher. Artists have more options for channels to market their work. High. Abundance of new online channels allow customers to discover music without publisher or CDs. Low switching costs.

Various in mature competitive market: Sony, Universal, Warner.

Take-away: given the high threat of substitutes and increasing power of both buyers and suppliers, EMI’soutlook is not bright if they do not immediately change their business strategy.

Dividend SignalingShareholder Characteristics Pay Don’t

PayTax Liability• High ☹ ☺• Low ☺Dividend Appetite• Habitual ☺ ☹• Indifferent ☺Investing Reason• High Dividend

Yield☺ ☹

• Indifferent ☺

• EMI’s dividend behavior sends different signals to different shareholders.

• Investors who are allergic to paying taxes seek no dividend pay and prefer share price growth instead.

• Investors who have received dividend payments before have developed a habit. Their internal cash flows may depend on a dividend payment from EMI.

• Shareholders who invest with the aim to receive dividends will seek dividend payments. If they do not, they may invest their money in another stock which will pay dividends.

1M+ Shareholders

It is worth mentioning that signaling consequences described in prior slide are exacerbated for investors holding 1 million + shares.

Large shareholders make up 0.6% of all investors but own 83.3% of total shares.

These shareholders are few but influential. Whatever is EMI’s signal, these are the shareholders who need to be considered.

Clientele Effect vs Miller-Modigliani

What results from EMI’s decided signal is either the clientele effect or the dividend irrelevance understanding by Miller-Modigliani. Clientele effect: if EMI does not pay dividends, shareholders will

sell their shares to dramatically lower company share price. Dividend irrelevance: even if shareholders sell, a new portfolio of

dividend-indifferent investors will buy. Share price remains.Additionally, it is possible to message dividend cancelation as a positive signal. By not paying dividends, retained earnings are being invested into worthwhile projects. This should excite investors and potentially inflate share price.

Dividend Payment History

Because EMI has a 6-year history of paying dividends its share price may be subject to the clientele effect. If EMI pays dividends, shareholders will assume business as usual. If EMI does not pay dividends, share price is more volatile and may fluctuate because shareholders are not receiving what they invested for.

CFO Responsibilities

Though much of the market is beyond control, as business manager the CFO has three primary responsibilities.1. Martin Stewart oversees the company’s working capital. He

must be aware of the business’s economic environment and ensure the company is investing capital in viable projects.

2. CFO must set proper expectations with the board especially in light of bad news. If Stewart will withhold dividend payments and potentially compromise investor relations, the board must be fully aware.

3. Finally, Stewart must set proper expectations with investors. On earnings calls, he must be the voice of financial reason to reveal that fiscal austerity may be imminent.

Dividend PolicyPay Don’t

PaySignaling ↑ ↓

Clientele Effect ↑ ↓

Company Financial Health ↓ ↑

Source LTD

Short-term Bandage

Long-term Commitment

Dividend Policy - Recommendation

EMI is rightfully concerned with the clientele effect; not paying dividends this year will send a strong signal.

However, in accordance with Miller-Modigliani’s dividend irrelevance theorem, withholding dividend may have little impact on clientele. Or if it should, the investors who sell will be replaced by new shareholders.

Paying dividends this year will offer a short-term bandage to investor relations but fail to give EMI cash flow necessary to invest in viable projects.

Therefore, due to EMI’s financial adversity, they should NOT pay dividends this year.

Dividend Policy - Recommendation

If EMI should decide it must pay dividend, it should source it from long-term debt.

Debt should be secured in Japanese Yen because: it is very stable with estimated 2-2.5% GDP growth in next two years Interest rates are lowest global at .74-1.03% in next two years

EMI must be aware that assuming this debt only serves to preserve the perceived health of the company in the short-term. It must invest in economically viable projects in order to survive long-term.