Hybrid Financing

Equity enjoys the claim on Residual income and has management control over the firm.

Debt enjoys fixed claim and not associated with control over the firm.

Hybrid sources share some features of Equity and some features of Debt.

Forms are hybrid financing are Preference shares, Warrants, Convertible Debentures and Innovative hybrids.

Hybrid Financing
Preference Capital: Features Cumulation of Dividends (Will be paid once dividend resumes) Callability (Issuer enjoys the right to call back issued shares) Convertibility (into equity shares as per covenant) Redeemability (Not exceeding 8 years) Participation in surplus profits (Entitle to participate in surplus profits. Voting rights (Before Companies act 1956, after the commencement of Companies act 1956, PS doesn t carry voting rights). They entitle to vote i) The preference dividend is in arrears for 2 years in case of cumulative PS ii) Preference dividend has not been paid for 2 years or more.

Hybrid Financing
Warrants: Features Entitles the holder to subscribe to the equity capital of a company during a specified period at certain price. (Normally attached with some instruments TATA Iron & Steel 1992 Secured Premium notes ) The holder has only the right to subscribe but does not have any obligation to acquire the equity shares Exercise price Exercise ratio (1:1) Expiry date (5-10 years although perpetual warrants can also be issued)

Hybrid Financing
Convertible Debentures: Features Right to convert them into equity shares on certain terms. Holder entitle to receive fixed income till the conversion option exercised. As per SEBI guidelines, - Compulsorily convertible debentures which provide for conversion within 18 months. - optionally convertible (Conversion within 36 months) - Conversion after 36 months but which carry Call and Put features. - Conversion ratio, Conversion price

Hybrid Financing
Warrants Vs Convertible Debentures: Both give the same option on equity. In Convertible debenture, Debenture and option are inseparable but Warrants can be detachable. Warrants can be exercisable for cash.

Hybrid Financing
Private Equity: private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Capital for private equity is raised primarily from institutional investors. There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries. Angel Financing: Capital raised for a startup company from angel (Affluent) investors. The capital is generally used as seed money. Angels are individual who include professional investors, retired executives with business experience and money to invest, or high net worth individuals looking for investment opportunities.

Hybrid Financing
Venture Funds: It is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture investment is most often found in the application of new technology, new marketing concepts and new products that have yet to be proven.

FM in Intangible intensive companies

Organisations employ tangibles assets like Land, Building and Plant and Machinery etc. Intangible assets are Technical Know-how, Human Capital and Brand equity. Firms in sectors such as IT, Biotechnology, Pharmaceuticals are more intangible intensive whereas sectors such as Oil, Automobiles are tangible assets intensive.

FM in Intangible intensive companies

Characteristics or Features of Intangibles: Intangibles are non-rival because they involve a large fixed cost and very negligible variable cost. The discovery of Drug and developing a software often requires huge initial investments but the cost of producing pills are negligible. Physical assets have well defined property rights but intangible assets have hazy property rights. Though invention is patented, non-owners can derive the benefits, referred to Spillovers . Thus, Protection of Intangible assets may require expenditure of significant financial and managerial resources. Usage of Licensed Genuine Microsoft OS Bajaj Vs TVS (Twin spark plug) Investments in Intangibles are very risky, some products turnout to be strategically very successful but some may be duds.

FM in Intangible intensive companies

Characteristics or Features of Intangibles: Intangibles do not have organised and competitive markets. The results of R&D can be manufactured and sold directly but R&D by and large can not be sold directly. (MIG-35, Fighter Aircraft) Value of intangible intensive firms is accounted by future growth value. Investors misprice the shares, sometimes they overvalue and sometimes they undervalue. It imposes the high cost of capital, leading to underinvestment in Intangibles. The returns of R & D are substantially high than the returns of physical assets. Managers have vague idea of returns from the intangibles. Very few companies are only having clear idea about should we increase or decrease the spending on Intangibles?

FM in Intangible intensive companies

Implications for Financial Management: Risk Return profile of Intangible intensive firms are very high. Managing physical assets are relatively easy proportion but managing the knowledge, talent of employees, copyrights of the organisation is relatively challenging task. Intangible intensive firms are rely primarily on equity financing. Intangible intensive firms are valued on future growth value. Thus the managers are constantly strive to convert the future growth value into actual value. Investors find difficulty in figuring the real value of firm, hence investor communication should be important. (The fundamental economic process)

Types of Intangible Assets: 1. Brands

FM in Intangible intensive companies

- Brand enable the customers to identify the products that promise specific benefits - A Name, Term, Symbol, or combination of them which is intended to identify the goods & services. 2. Publishing Rights - Commercially exploiting creative and knowledge based materials. A) Copyrights (Books, Articles etc.) b) Trademarks (Titles of magazines) 3. Intellectual Property - The owner of an IP is legally protected against its unauthorised use. - Patent is an invention that has commercial potential which has granted legal protection. It gives monopoly rights to manufacturer.

Types of Intangible Assets: 4. Licenses:

FM in Intangible intensive companies

- It is an agreement through which a licensor assigns certain rights to a licensee in return for considerations. Approaches to Valuing intangible assets: 1. Cost Approach: - Value of an asset may be obtained by aggregating the costs (Historical costs and replacements cost) 2. Market Approach: - Value of intangible assets may be established with reference to the prices at which comparable assets have been traded recently in the market. Intangible assets are unique, making comparison rather difficult. 3. Economic Approach: - Estimating the cash flows expected to be generated by the intangibles.