Football clubs can give a positive impact on a town or city. There will be many fans attend a game. From that, they can increase the fan base loyalty. The loyalty of fan is important for a football clubs especially when it is season of ticket sales because it will bring more business to local communities and indirectly they can generate unlimited money through the usual activities if the football clubs is successful. Michel, Wladimir et al. (2010) said that the revenues of the football clubs mainly from three sources which is TV broadcasting rights, gate receipts and a commercial source (sponsorship and merchandising). Initial public offerings (IPO) is an effective way to raise capital and make their team to expand that is why IPO is being initialized by the football clubs. Looking into the past, Fredrik and Gareth (2015), they believe that the preferences and the background thinking of investors have a different due to the specifics of the industry they are investing in. For examples when a sport clubs like football clubs going public, usually the investing activities will be the fans and that love or support the clubs.
According to Cheffins (1999), he believes that the main reasons of the sport clubs going public is because they belief that raising new capital to build large arenas will attract more interest from the supporters of the club that lead to increase in revenues.
2. What is IPO? What are the advantages and disadvantages of IPO to the football clubs?
An IPO is initial public offering that represents the process of changing the ownership of a firm from private to public. It involves private companies offering their shares for sale to new investors and for those shares to be freely tradable on a stock exchange. However, the stock market listing of a sport clubs is not a simple operation.
Advantages of IPO
IPO is an effective way to quickly generate a large amount of capital. As we know, football clubs have a high expenditure, so they can use the capital to cover their expenditure especially for a professional football clubs team. They also can use the capital for construction of stadiums as it is cost up to billion dollars and that is extremely pricey. In the context of football clubs, the benefit for them going public is to allow their supporters to invest in the club. Besides, the proceeds from an IPO is a way for the team to reduce the large amount of debt. In addition, when the football clubs going for public, they aim to get a wide variety of investors. They also want to become a public listed company is because they can improve their image of the club. When they transformed into public listed company, they can get the benefits of best practices of privileged communications.
Disadvantages of IPO
According to Szymanski and Hall (2003), he notices that a listed club’s wage bill is significantly higher in European football although the IPO should improve clubs’ transparency and governance by transferring control to the shareholders. This can be support by the research conducted by Ritter (1987), going public required a high expenditure as the football clubs must hire a professional accountants and lawyers to make sure all the annual reports are in good quality. In the research conducted by Wilkesmann and Blutner (2002) that investigated for German football clubs which going to public. They found out that three possible patterns in their decision making. There are several organizational changes must be made, such as, a board of directors has to be installed. The role of the board of directors is they will supervise and monitor the operations management. This indirectly can lead the corporation to lose its autonomy. When a football clubs decide to go to public, they must deal with many complex requirements compare to non-listed football club. They must provide a detailed information about their financial decisions for each year. This might be a disadvantage because before this the information was confidential and not available to everyone. But now, this information is available to everyone who is interested in it. In the research made by Ritter (1991), he found that there is an evidence that companies who have going to public tend to underperform in terms of their adjusted returns. According to Szymanski and Hall (2003), there is a little improvement of performance after the football clubs is going for public. According to Cheffins (1999), to ensure profits to shareholders was not efficient enough only by the management of the football clubs. This is confirmed by the findings in the case study of European football clubs, that many football clubs’ share price dropped after undergoes IPO. The reason for the decrease is the football clubs are overpriced at IPO time. But, not all football clubs share prices are decreased. For an example, the share price of Tottenham Hotspur’s is increased after the IPO.
3. How do financial markets in general benefit an economy?
A financial market is a market which is financial assets (securities) such as stocks and bonds involve in buying and selling activities. Funds are assigned in financial markets when an individual purchases financial asset previously held by another party.
According to Babble & Santomero (2001) financial markets act as intermediating, savings and investing to perform well in economic growth, thereby encourage financing and investing by households, firms, and government agencies development. Financial markets have two primary purposes. Firstly, is to trade claims on output between economic agents that have different timing needs for consumption. Some economic agents willing to transfer current resources for the future, while others need access to current output for current period consumption. The current markets make such trades. The second function perform by these markets is to encourage liquidity for the exchange of financial claims created to transfer purchasing power across the time. This encourage trading in financial assets between agents that wish to buy and sell them before maturity.
Current output and economic activity affected by the activities performed by financial markets. The system of markets helps economic agents to deploy their economic resources to best advantage. The participants in the economy and household, corporations, and the government itself act as economic agents. Some economic agents have many resources than they tend to use during the current time, others have not too much. Economic agents in the first group, are categories as surplus economic units. Surplus economic units are the participants who receive more money than they spend such as depositors. They wish to save part of current income for future consumption. For
the second group of economic agents, known as deficit economic units, tend to gain access to current income for use either for current consumption beyond existing income sources or for investment and its future expected return. Surplus economic units act as money supply for deficit economic units. When depositors deposit money to the surplus unit, they have excess money that can transfer into funds to the borrowers. The consumption will increase when the borrowers hold the funds, at the same time sale will increase, production will develop, purchases of raw materials will increase, employment rate will increase, and the economic growth will perform better. Too see how this is accomplished in the financial markets, consider a simple economy with both individuals or households and business firms. Meanwhile some of this income is generating for consumption, some of it is saved to be used later. Households may save in two methods. They may buy goods and inventory that will last longer, or they may buy financial assets issued by firms, which, in turn, use current output for such things as equipment or inventory investment.
Mishkin & Eakins (2009) mentioned that financial markets also transfer funds from those who have excess funds to those who need funds. They enable college student to obtain student loans, families to obtain mortgages, businesses to finance their growth, and governments to finance many of their expenditures. Without financial markets, many students could not go to college, families could not purchase a home, corporation could not grow, and government would not have been able to provide funding to corporations. Households and businesses that supply funds to financial markets would not be able to transfer funds to those who need them. Economic will perform well in order whenever the surplus units transfer the excess funds to the deficit units which need the funds. This can be seen by when deficit units which borrowers are got the funds and consumed it for the better use. Through this way, the increasing of consumption can be seen, the sale also will increase, the production also will increase, purchasing of raw materials will increase, and unemployment rate will decrease will contribute to the economic growth. Channeling of funds from surplus unit to deficit units so important to the economic growth. This is because there are differences between people who save frequently compared to people who have profitable investment opportunities that is available to them such as entrepreneurs.
As stated by Madura (2004) real economy is affected by efficient financial markets. From the point of view of surplus units, efficient financial markets provide them with an opportunity to increase future consumption by allowing others to use their surplus current income. The yield that surplus units obtain from the financial asset means higher consumption tomorrow. In addition, it encourages thrift by allowing individuals to defer current consumption tomorrow and build wealth in the future.
At the same time, investors in the real economy benefit from the access to resources that an efficient financial market permits. By providing resources necessary for increasing equipment and productivity, an efficient financial market enables the business sector to invest in the future. To the extent that resources are readily available, investment high, and the firm can finance expansion and exploit profitable opportunities.
For the company and efficient financial market means a higher growth rate and a better standard of living. Higher consumption is the made possible by greater capital intensity and greater output well into the future. Unlike the stereotypical view of financial markets as a wasteful activity without a real resource effect, financial markets are an integral part of a developed economy. They allow specialization and a complex flow of resources between borrowers and lenders. Very specialized projects are financed through the financial markets and their institutions, as the expertise of specialized is tapped to funnel funds into their most efficient use. In fact, no developed economy can maintain a high level of consumption and growth without a sophisticated financial system.
4. Elaborate FIVE (5) differences between stock financing and bond financing.
Securities is something that can be bought or sold, and which also have an economic value. Securities that are issued by corporations may be classified into two forms which is as equity securities and debt securities. There are two ways that company can raise its capital. First, when a company wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generally called bonds. Debt represents something that when we borrow money, we must repay back the money which is include interest too. When corporations borrow, they generally promise to make regularly scheduled interest payment and to repay the original amount borrowed. Secondly by selling shares of itself, essentially allowing other people to become partial owners of it which is stock. Stock is referring to the equity that is the value of ownership interest in a corporation. Some corporations issued stock as a way for raising its capital because they want to avoid taking on debt, but some corporations choose debt financing because of several reasons. From a financial point of view, the main differences between stock financing and bond financing are:
a) Voting power
The difference between debt financing and equity financing is debt are not an ownership interest in the firm. This is because bonds are a form of debt that issuing entity promise to repay the borrowed money meanwhile stocks are the shares in the ownership of a corporation. So generally, bond holders do not have voting power compared to shareholders that can vote on choosing of new directors as an example. Shareholders have the rights to vote because they have their shares in the corporation they are invested. So, they have the right to vote and making decision for the company because they are the owners and shares the profit and losses of the company they are invested.
b) Tax Deductible
According to debt financing, the corporation must make payment of interest based on the amount of their money borrowed and must pay in a fixed amount. The payment of interest is considered a cost of doing business and is fully tax deductible. But, according to equity financing, dividends that is paid to shareholders are not tax deductible.
c) Liquidity
Stock financing are more liquid than bond financing. Companies that has cash flow will choose to raise debt financing because they can repay the debt. This is because debt must be paid. So, unpaid debt is a liability of the firm. If it is not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Hence, one of the disadvantage of issuing debt is the possibility of financial failure. This possibility does not arise when the company choose to issued equity.
d) Risk
Bonds is less volatile than stock in other words bond financing is less risky compared to stock financing. When shareholders invest in the corporation, they must choose the corporations that perform well so that can give them higher dividend, or they invest in corporation that will earn them an acceptable return that justifies the risk of the investment. If the corporation they are invested is in the bankruptcy situation, shareholders will not get dividend and loss their money. Compared to bond financing which is the creditors will only have to make payment of the money borrowed plus interest and has no direct claim on future profits or loss of the corporation.
e)
Fluctuation in value
For a stock financing, the value is determined by multiply price-earnings (P/E) ratio times the earnings per share (EPS) on the stock. Assessing the stock price does not follow a clear-cut formula because they are looking up to supply and demand and other economic factors too. Some corporations favor stock financing because they are not legally responsible to repay the money. Price of a stock will increase substantially which will result increase in the return that shareholders will get on their investment. This will benefit to the stock financing when the price of a company’s stock rises, the shareholders will earn an immediate capital gain. For the bond financing, fluctuate in value occurred on the market interest rate, the investor’s discount rate, the length of the maturity, par value, or face value of the bond. Investor will earn the profits if the corporations is listed and can look up to interest rate as an indicator to know how much the bond will worth in future.
5. Explain the statement “markets enable the separation of ownership and management of the corporation, allowing an optimal allocation of scarce resources”.
The statement “markets enable the separation of ownership and management of the corporation, allowing an optimal allocation of scarce resources” means that the limited amount of capital that one company has can be used effectively to operate the company since there is a separation between ownership and the management of the company. The owner of the company and the person who are responsible to manage the company is a different group of people. This separation is created as the company want to avoid the conflict of interest between the owner and the management. The owner of the company consists of the investors and shareholders while the management consists of the board of directors who are responsible in a day to day operation of the business.
Conflict of interest between owner and management exist as the owner and the management team of the company have their own goals to achieve when they decided to join the company. The owner of the company which consists of the shareholders and investors might aim to get the maximum amount of dividend from the profit of the company that they invest but it is different with the goals targeted by the management team. Furthermore, the conflict of interest also arises due to the lack of interest from the investors about the daily operation of the company. For example, investors might only focus on the amount of dividend that they will get from the retained earnings of the company and might not care about how much amount of money that the company need to buy a new asset to operate the company. Therefore, there might be issue arise as the investors will not be pleased if they do not get the dividend that they want.
The goals from the investors’ perspective is contradict with the goals that want to be achieve by the management team which is to ensure the growth of the company by allocating the limited source of capital effectively in terms of buying the assets for the operation of the company. Since the management team manage the day to day operation of the company, they will know more about the problems that currently faced by the company. For example, they know about how much money from the retained earnings that they should allocate to purchase more assets to ensure the continuous of the production. The management team might have already allocated and budget the amount of money that should be used from the amount of retained earnings of the company. This situation will then create the conflict of interest as the amount of money that they have is limited.
Even though the market enables the separation of ownership and management of the corporation, but there might still have a conflict of interest between management and ownership. Therefore, the management of the company must try their best to avoid this conflict of interest. For example, they can create a dividend policy that can be accepted by most of the shareholders so that they will not lose the source of their capital from the investors. Investors also should be exposed with the long-term profit that the company might gain if they decided to invest in a new asset such as machine to be used in the production of their product.
To be conclude, by having this separation of ownership and management, it will allow managers to use the scarce resource at the optimum level to grow and operates the company and thus increase the profit gain by the company in the long-term period. Besides, the resource of the company can be used at a maximum rate since the shareholders cannot interrupt the operation of the company. The investors also must be more optimists and they must not just be focusing on the dividend that they will gain from the retained profit only, but they also must see from the long-term perspective which might be a lot more benefit to the company and themselves as the market share price of the company that they invest will be increase as the company grow. Lastly, to avoid any conflict of interest, the management team can create a dividend policy that can be accepted by all the shareholders to make sure that both parties will get benefit from it.
6. Do you think a football club can benefit from a stock market listing? How? If not, why?
The football clubs cannot benefit from a stock market listing. The first reason, based on the past statistics, there are many football clubs that do not perform better after the IPO. Poor performance on the pitch will influence the stock price. This is because when one club is public listed, it is important to maintain and increase its performance to make sure that the stock price will increase. Lower stock price will reduce the confident of the investor on the football clubs on generating more profit. For example, in Italy, due to the bad performance by the club had led the Lazio to quote low stock price in the stock market. Leleux & Muzyka (1997) work they examined the negative results on the long-run performance of European IPOs, thus showing a decreasing trend in the European IPO market.
The second reason why the football clubs cannot benefit from a stock market is because of the higher cost and to maintain listed. Based on a study by (Kratofil, 1999) the cost for the IPO is about 15% or more of the real capital generated. 15% is a very large amount consider to the total of the raised capital. The high cost for the IPO is due to the investment bankers that responsible for the pricing, selling and market the securities to the public. Also, the cost to create filings for the Securities and Exchange Commission and handle various legal issues throughout the process. There are also other expenses such as the need to hire certified accountants to prepare the financial statements, this is not a one-time expense since the lawyer, accountants and attorney are needed to prepare the report and statements every year as required by the Securities and Exchange Commission. Other cost such as cost for the annual meetings, materials, maintaining a registry shareholders and high income of player. These may sound simple and insignificant but the nature of sports stock in the past makes them expensive and hard to deal with (Joshua Hubman, 2011)
The third reason is when a football clubs going public, there are no proper management structure. After going listed, organizational restructuring must be made since the club must have the board of directors to supervise and monitors everything in the clubs. The management of the corporation will lose the autonomy. Not proper management structure and unclear division of task will lead to the bad performance in the stock market. The shareholders also do not gain any additional benefits of being an owner. Besides, the club also face disclosure. A club that is going public is required by the SEC to disclose all their financial reports to the p
ublic. We live in the era where all actions and performances of the club will be published and criticized by the media. All the information will just give more criticism to the club by the media because we know that football sports is one of the sports that give very high influence on people around the world especially if their performance are very bad.
7. Explain the factors that contribute to the increment in the football clubs’ stock price.
The primary factor that contributes to stock price increment is the football club’s earnings. Earnings are the money the club makes after it pays its liabilities. If a football were to go public, it will be required by the Securities Commission to report their earnings. Therefore, investor will use the financial earnings to determine its future value. Therefore, the stock price might rise when it reports positive earnings and declines when it experiences a loss in net income.
Apart from earning, the club performance is one of the most key factors to affect the stock price. For example, Manchester United football club’s stock price will likely to rise when they won consecutive games in domestic games and international games or when they won any cup from domestic or international tournament. It is because typically investors will see this as a positive event and if the demand for stock rises, the price would likely to be increased as well.
Renneboog & Vanbrabant (2000) received a result that stated a positive correlation between the football clubs’ performance and their stock’s price development meaning a positive result (win) in a game increased the stock’s price while a negative/neutral result (defeat/draw) would decrease the stock’s price. If a club won, the stock price would on the subsequent trading day increase (on average measured in abnormal return) by almost 1% while a loss or draw would penalize, respectively, the price of the stock by decreasing 1.4% and 0.6%. The above mentioned statistical model again confirms the correlation between “on-field” performances.
The club’s share price can increase too if the club repurchase their own share. Investors often view buybacks as management possessing a positive outlook on the club’s future.
Football Club’s stock prices increase, and decrease based on investor supply and demand within the market. Therefore, these are some of the factors which contributed to the increment of football club’s share price.
8. Suggest other alternative modes of financing for the football clubs.
Other alternative modes of financing can be provided through either internal or external financing. Example of internal financing would be sourced by increasing revenues and decreasing the expenditure. Main revenue of football club like media rights revenues, which are sold through contracts before the launch of a new season. For certain periods, these revenues can be considered fixed. In this case of course, growth opportunities are highly limited for the duration of these contracts. Therefore, revenues from media rights, can be considered a given condition depending on the previous season, which of course does not mean that the club should not try to generate as much revenue as possible, as media revenues are usually the most important and had been intensely a growing revenue source for professional football clubs.
Another example of internal financing of a football club would be through sponsorship and advertising revenues or the ticket revenues. However, these modes of financing have to take into account with the establishment and results of the football club, for example sponsorship, to provide sponsors to a football club, the sponsors would be expecting something in return and sponsorship could be in the form of direct advertising as well, for example, players does a commercial for a shoe company and wears that company’s shoes when he plays. This is because of the ability of football clubs to provide exposure and the visibility of a company or brand to the public.
But of course, if football clubs wan to gain sponsors, they would also need to have enough visibility to make it worth the sponsor’s investment. If it does not fulfil neither of the criteria, external financing opportunities need to be taken into consideration starting with outside financing. Outside financing of football clubs usually meant loan. It can be financed through issuing bond as it would be viable option for football clubs, whose economic results are adequate and whose legal form allows them to issue bond.
Instead of focusing on yields alone, combining with strategic business partner or foreign investment would be a good option as well, whereby their cooperation will be based on a special combination of business interest and profit, which encompasses utilizing the synergies that exist between football and business enterprises. To achieve positive effects, the prerequisite is the high intangible result of the football enterprise, which the partner can utilize for economic purposes.
These are the some of the most viable alternatives that could be done to finance a football clubs apart from converting football club from private to public through an initial public offering.