Corporate Finance group project

1. THE CASE OF EMI GROUP
• Phan Từ Như Ý
• Nguyễn Thu Hà
• Nguyễn Thị Ngọc Dung
• Trần Việt Anh
• Ngô Thùy Tú Uyên

2. SUMMARY OF
THE CASE
• An overview about music
industry and EMI group
• Digital revolution and its
effects to music industry
and EMI

3. AN OVERVIEW ABOUT
MUSIC INDUSTRY AND
EMI GROUP

4. THE MUSIC INDUSTRY
• Businesses and
organizations that record,
produce, distribute recorded
music
• 4 main participants: artists,
audience, music agents,
distributors
• Oligopolistic
• Huge transformation

5. ELECTRICAL AND MUSIC
INDUSTRIES (EMI)
• Columbia Gramophone
Co. + Gramophone Co.
• Record, publish music,
electronic device
• Major successes in
1950s – 1960s: 2/3
world’s recorded music

6. ELECTRICAL AND MUSIC
INDUSTRIES (EMI)
• Recorded music:
Finds potential artists,
long term corporation.
• Music publishing
Assists publishing-rights
rights owners (song
writers, music composers,
composers, …) to
promote their products

7. THE KEY ACQUISITIONS
CONDUCTED BY EMI
Acquired in 1955 Acquired in 1992

8. DIGITAL REVOLUTION
AND EFFECTS ON MUSIC
INDUSTRY AND EMI

9. DIGITAL REVOLUTION AND
EFFECTS
• Digital audio + MP3 + Internet = digital
revolution
• Advantages for consumers: easy, fast,
convenient
• Disadvantages for producers: decrease
physical product sales, artists no longer need
much help from music agents.
• EMI revenue: reduce 27% from 2001 to 2006

10. DECISION OF THE BOARD OF
EMI
• Regular dividend: 8p per
share
• Interim dividend: 2p per share
(Nov 2006)
• May consider paying extra 6p
per share to maintain regular
dividend

11. DIVIDEND
POLICY
THEORIES
• Irrelevance of dividend
policy
• Information content of
dividends
• The Clientele Effect
• Bird-in-hand theory

12. IRRELEVANCE OF DIVIDEND
POLICY
• The dividends’ timing doesn’t matter when
cash flows don’t change.
• Whether they use alternative policy or
homemade dividends, it stays the same to
investors in the long term.

13. INFORMATION CONTENTS OF
DIVIDENDS
• Stock price generally goes up when the firm
announces an increase in dividend and vice
versa
•Cash flow volatility
•EMI group was not sure about their great
growth in the future

14. THE CLIENTELE EFFECT
• Different groups of investors have varying
preferences towards dividends
• If the market reflection is already clear -> not
maintain current payout ratio may hurt stock
price
• The Nov 2006 dividend announcement of 2p
per share

15. THE CLIENTELE EFFECT

16. THE CLIENTELE EFFECT
 The firm would want to keep 8p per share
policy as oppose to 2p per share

17. BIRD-IN-HAND THEORY
• Investors may prefer current
dividends to a promise of a
higher but riskier income in
the future
 keeping a dividend of 8p
per share is preferable
(short-term investors only)

18. DIVIDEND POLICY
THEORIES (CONT)
• Agency cost theory
• Transaction cost theory
• Pecking-order theory

19. AGENCY COST
THEORY
“Keep cash away from
managers”

20. THEORICAL SUGGESTIONS
Ownership spread
situation
More ownership concentration,
more influences  less agency
cost and lower dividends need
Free cash flow
situation
Firms with less growth
oppotunities and a lot of
financing cash “leftover”
 incentive managers to
waste
 pay higher dividends

21. EMI APPLICATION
• EMI had less growth
opportunities as its core
business divisions
(recording and publishing)
were currently hit by the
rise of free-sharing
platforms.
• EMI also has a lot of
cash in hand
 EMI should pay high
dividend to prevent
managers to invest money
From Free Cash Flow view

22. EMI APPLICATION
• However looking at EMI’s shareholders concentration,
there are 3 companies/ funds hold nearly 30% shares in EMI
•
From Shareholders’ view

23. EMI APPLICATION
These shareholders concerned about EMI’s management more than
its dividends payment
1. They approved the restructuring program – which will cost GBP
150 million in 2007, but will save GBP 110 million per year in the
long run
2. Management had “lost all credibility” – announce 6%-10% decline,
actual 15%
3. Wellington Management Company, LLP was famous for
investments in companies with highly confident strategic
management team
 No need to pay 6p dividend.
 Instead, EMI could use the money saved from no dividend
From Shareholders’ view

24. TRANSACTION COST
THEORY
“More borrowings more
repayments”

25. THEORICAL SUGGESTIONS
High financial
leverage
High financial leverage, high
transaction costs
 lower payout ratio
Growth
Firms with prospective
oppotunities
 keep money for
reinvestment
 lower dividends

26. EMI APPLICATION
EMI currently have high
financial leverage ratio
compared to its competitors
 high transactions costs.
Also, higher rate of returns
from creditors
 should reduce the
dividends payment

27. PECKING-ORDER
THEORY
“internal financing goes first”

28. THEORICAL SUGGESTIONS
Promising investment opportunities
• Firms have a particular preference order for capital used
to finance their businesses (Myers and Majluf, 1984).
• The firm will prefer retained earnings to debt, short-term
debt over long-term debt, and debt over equity. Equity
issuance become expensive because of information
asymmetry.
• Firms with more internal financing preference, and more
investment opportunities, will pay less dividends

29. EMI APPLICATION
The industry was
turning bad as a
whole, resulting in less
investment
opportunities (or even
riskier investment)
 EMI should consider
to maintain dividend
payment to reassure
outside investors. (pay
6p)
“The industry was getting toug

30. RECCOMENDATIONS

31. EMI SHOULD DECREASE ITS
DIVIDEND PAYOUT,
BECAUSE…Digital audio appears  downturn of music
industry
+ EMI’s ill-performanceThe signaling effect of maintaining the
high dividend payout
Develop sustainable strategies to maintain
the future growth

32. EMI SHOULD DECREASE ITS
DIVIDEND PAYOUT,
BECAUSE…
Issuing more debt to pay dividend
Financial distress cost increases
Hard for EMI to borrow debt
with favorable cost

33. EMI SHOULD DECREASE ITS
DIVIDEND PAYOUT,
BECAUSE…
Paying dividend
reduces EMI’s
flexibility to
invest
Put the company
in danger ;
The investors will
go away faster

34. IN CONCLUSION…
EMI should reduce its dividend payout
and use the money left to help the
company survive.

35. ANY QUESTIONS?