Target's Finance Policy And Capital Structure example essay topic

Target Corporation: Report on Long-term Financing Policy and Capital Structure with an Acquisition Analysis Introduction This report will be based on the Target Corporation, and will consist of two sections: 1) long-term financing policy and capital structure, and 2) an acquisition analysis. The first section will include: Target's most recent long-term financing decision; an analysis of the economic, business, and competitive background in which the financing occurred; Target's book value and market value; possible changes that would occur to Target's finance policy and capital structure if it was forced to consider re-organization and bankruptcy strategies; and finally discuss Target's international investment and financing opportunities, as well as foreign exchange risks. The second section will be a report to the board of directors that identifies a synergistic acquisition candidate for Target. This section will identify Target's proposed acquisition terms, price, financing, and potential negotiation strategies.

This segment will also include price / earnings ratios, book value, current market value, and liquidation based on the supporting financial data. Also in this part will be a discussion of the general and specific risks inherent in an acquisition strategy. Background Information on Target According to web Target is an upscale discount retail chain that sells quality products at attractive prices, and prides itself on clean, spacious, and guest-friendly stores. Target is the second largest "general merchandise" retailer (behind Wal-Mart); selling almost anything one would need to complete the "one stop shop", especially with the addition of the Super Target stores. The first Target opened in Roseville, Minnesota in 1962. Since then, 1,330 stores located in forty-seven different states, which includes the 141 Super Target stores, have opened nationwide.

Target also has twenty-two distribution centers located in nineteen states. In addition to the vast number of store locations, Target also has other businesses that include: Target. com, Target Financial Services, Associated Merchandising Corporation, and Target commercial Interiors. Through all the key businesses, Target employs nearly 300,000 people from diverse backgrounds. The current Chairman and CEO of Target is Bob Ulrich.

Section 1 - Long-term Financing Policy and Capital Structure Target has seen consistent growth since its inception, and has confidence that future growth will continue (see attached financial statements). In 2004, Target sold two of there business units, Mervyn's and Marshall Field's for approximately $4.9 billion. This allowed for extensive aggregate pretax cash that will be used for future store sites (as well as upper management bonuses). Target's Board also approved a $3 billion share repurchase program which they expect to complete in two to three years. The reason not clear for this, but Target probably thought that its stock was undervalued.

Target's recent financing strategy, in a nutshell, is to minimize the cost of borrowing. Target wants to make sure liquidity (converting assets into cash quickly) and access to capital markets (markets for financial instruments with an initial life of one year or more) remains a high priority. It also wants to sustain net exposure to floating rates and preserving a balanced gamut of debt maturities. Target wants to fund more capital expenditures, repurchase shares of stock, increase accounts receivable, increase maturities of long-term debt, and build up seasonal inventory. Target believes this can be accomplished by incorporating cash flows from operations with current levels of cash equivalents, proceeds from long-term financing activities, and issuance of short term debt (web). Target's capital structure (the mix of the various types of equity and debt used) decisions are based on four factors: business risk, tax position, financial flexibility, and managerial attitude.

Essentially, management is trying to maximize the stock price and decrease the cost of capital, which will increase shareholder equity. According to the Statement of Financial Position, Target is carrying a $9,034 million debt. So utilizing debt coupled with common and preferred stock, make up the majority of Target's capital structure. Of course, with debt comes risk. The fear and uncertainty of future earnings and operating income can sometimes come with a high price.

For example, the interest rates may be unsuitable to take on debt to raise capital, therefore costing more than raising capital from equity. Target's Value Target's book value (assets - liabilities) or net asset value, according to the financial statements, is $24,073 million (Target Corp. 10 K). Target's market value ("the current quoted price at which investors buy or sell a share of common stock or a bond at a given time" -. com) is $45.27 billion (Forbes. com). According to. com market value also considers future growth potential. Forced Changes If Target were forced to consider re-organization and bankruptcy strategies the changes that may occur to its finance policy and capital structure could be devastating. Target is currently the number two retailer behind Wal-Mart, but would change with any sort of re-organization or bankruptcy.

Target would have to liquidate its inventory in order to repay its debt. It would also have to close plants and cut employees to reduce overall costs. Target would also have to sell many of its assets and plants around the Unites States in an attempt to pay shareholders, specifically the preferred stock holders. This all could cause serious problems in the future if Target plans to make a rebound because Wal-Mart could potentially take over the prime store locations. Global Market Target has not yet made the transition to the global market, but it may be a worthwhile adventure. Investing long-term overseas has become much easier with more deregulation of the world's financial systems.

In addition, business and communication have become so much simpler with the increase in technology that not investing in the global market is rare. Coupled with diversifying its portfolio, Target should consider opening stores globally. Target, with its additional line of business in credit cards, would be well positioned to do so. There are inherent risks with such investment business adventures, specifically with the foreign exchange.

For example, if Target owns shares in Hitachi, the Japanese company, it will lose if the value of the Yen drops. This is true in any country when the value of its currency drops. Now, if Target was to open one of its Super stores in Japan, it would have to consider that revenues are influenced by currency changes and would have to adjust accordingly. Section 2 - Acquisition Analysis This section will be a summarized report to the board of directors that will identify a synergistic acquisition candidate for Target.

After careful consideration an excellent acquisition candidate would be Sears Holdings Corporation (SHC). SHC is the third largest retailer in the U.S. (behind Wal-Mart and Target) and the parent company of Kmart and Sears, Roebuck and Co., which merged on March 24, 2005. SHC has approximately $55 billion in annual revenues (sears holdings. com). In addition to the annual revenues, this would be an excellent acquisition because both Kmart and Sears have a global presence, as well as prime real estate and store locations in the U.S. Sears and Kmart also have well known and established proprietary labels and brands, such as Kenmore, Craftsman, Diehard, Lands' End, Jaclyn Smith, and Martha Stewart to name a few.

Other advantages from this acquisition could be increased market share and competitive position, as well as removing the number three competitor. Target's proposed acquisition will be completed in the third quarter of 2005 for $19.5 billion, which is $2 billion over the asking price. The Kmart name will be replaced with the Target name on each of the stores. The stores will be renovated to meet the higher quality standards and the shopper friendly atmosphere of Target.

Some of the brand names and labels will stay in the stores with the current upscale Target brands. In addition, Sears's quality products will be introduced into the new and existing Target stores. The existing Sears locations will also be converted into Target stores, which include all mall locations. This will be a cash tender offer coupled with stock offerings. Financing of the cash portion of the acquisition will be handled through debt.

Target has a great credit rating, so obtaining financing will be through the numerous banks it has previously obtained debt to raise cash. The equity portion will be through additional stock issuance to current shareholders of Sears Holdings. The following financial data on Sears Holdings Corporation was obtained on May 2, 2005 through a Yahoo. com and Forbes. com search: 1) Price / earnings ratios = 12.19 (yahoo. com) 2) Book value = There is no current balance sheet for SHC to obtain assets minus liabilities due to the recent merger of Kmart and Sears. The latest book value / share info was $50.95 (forbes. com) 3) Current market value = market cap. shares multiplied by the closing price = 20,055.88 (millions) x 134.46 = 2,696,713.625 (millions) (forbes. com) 4) Liquidation - total cash = $3.44 billion, debt = $371 million - no balance sheet to capture total assets and liabilities (forbes. com) Risks There are many items that require due diligence prior to an acquisition, and risk is one of them.

Some of the general risks that are inherent in an acquisition are regulatory approval, protracting negotiations, damage to credit, and rises in the cost of capital. The Securities and Exchange Commission must approve the deal prior to acquisition. There could also be long drawn out negotiations that could cost more in the end than initially thought. Another potential risk could be that the credit of the acquiring company could be damaged if they are unable to pay back the outstanding debt they incurred securing the cash and equity needed to acquire the other company. Conclusion The first section of this report discussed the Target Corporation and its long-term financing policy and capital structure. It also identified Target's book value and market value, as well as international investment opportunities and risks.

The second section discussed the acquisition of Sears Holdings Corporation and the specified terms that go along with it.

Bibliography

web - Target Corporation - 10 K Report - Retrieved 04/27/05 web - Retrieved 04/28/05 web - Retrieved 05/02/05 web - Retrieved 05/02/05 web - Retrieved 05/02/05 web - Retrieved 05/02/05.