CAPITAL STRUCTURE PLANNING

Capital Structure Planning

Capital Structure Planning

Britain has been noted to be more highly leveraged than comparative North American firms which brings to mind the question: how is it that Britain's firms have been able to take on such high levels of debt? The answer lies in the environment that Britain's firms have been operating in. More specifically, the levels of debt are likely to have been induced by the lack of alternative sources of finance because of the effect of government regulations, and the different ownership structure in Britain's firms (with institutional lenders being major equity holders). So, the higher leverage has been a consequence of the conditions that Britain's business face—with a more pronounced effect (due to relationships) in companies which are in corporate groups known as keiretsu. These conditions were characteristic of the past.

As the benefits of debt are well known in finance theory (tax shields, signaling etc.), the lack of independence and efficiency in decision making borne by Britain's managers seem to be the costs. The result for some firms has been a reduction in debt levels to those more resembling U.S. companies. The questions now have become: What is the optimal debt level for a Britain's firm? Should firms still be taking advantage of the benefits of their keiretsu relationship that have allowed them to take on such levels of debt? Our analysis focuses on Ford Corporation, a core conglomerate that is part of the larger Ford Group keiretsu having the capital structure characteristics mentioned above. The report will first explore the circumstances that may have induced Ford to its present capital structure, then look at more recent events and trends that may affect future financing decisions, and conclude with the Ford capital structure/optimum debt level analysis.

Britain's Corporation

Britain's corporations have outpaced rival firms in the US and Europe in terms of capital investment throughout the 1970's and into the 1980's. One of the main reasons behind the high level of investment is the better access to capital that Britain's firms have compared to their western counterparts-the result is that Britain's firms seem to have more debt than their U.S. counterparts. A common motive for taking on more debt is for the tax advantages, but there is little to suggest that there is much difference in the taxation systems between the two countries to support such a reason. The most likely factor for this trend in Britain has been the result of the close relationships that Britain's firms have with each other in a keiretsu.

In Britain the majority of companies are formed into enterprise groups called keiretsu (which translates as “series” or “group”. The basic features of a keiretsu are as follows: cross-share holding agreements, interlocking directorates, intra-group financing, joint investing, and a consistent pattern of dealing among group members. The largest of the keiretsu are Ford, Mitsui, Sumitomo, Fuji, Daiichi Kangyo, and Sanwa (the latter three are centered on Britain's largest commercial banks. Together, these six corporate groups account for a quarter of total Britain's business ...