Why a Football Clubs Want to Become a Company?

Why a football clubs want to become a company?

In this 21st era globalization, financial market has played an important role within the accumulation of capital and the manufacturing of products offering. Financial markets bring several functions to economy such as provides liquidity to financial assets, reduce the transactions cost, risk sharing, and price determination. For example, if football clubs want to merge their association to become a company, they will need a lot of funds to proceed their corporation. Usually, football clubs can loan money from commercial bank (Maybank, CIMB bank) or issue the bond publicly to get the investors fund. Otherwise, football clubs can raise their funds by issuing stock to market maker.

As we know, a club is an association identical by a common goal which are taking part in services such as sports, social activities, and political clubs. Typically, a service club are established by volunteer people without gaining any profit or maybe gaining limited profit. The club is just a charity organization which help others in society and their development scope are narrow. However, a company is a legal entity which enjoy most of the rights and take on responsibility to their business operation. For example, the company has the rights to issue bond, share, hire employees, own assets, and pay taxes; company able to gain profits in their business compare to club which is charity organization without any profit.

For our case of study, football clubs tend to change their clubs to become a company. What is the factors that influence football clubs to change their minded? There are several factors that lead to this kind of condition, which are:

a) Limited Liability

Football club's members can protect their personal assets by converting clubs into company. This is because a company is a separate legal entity from its owners. Therefore, the company take the responsibility to payback its own debts. In these circumstances, creditors can only seek payment from the company's assets if the company declare for bankruptcy. As a result, there is no risk on the company's owner personnel property.

b) Perpetual Existence

Corporation are the most everlasting business structure. Corporation will continue operation regardless of what happen to owners or shareholders. Its means that legal entanglement may be avoid by members of corporation. Members may come and go, but the company will continue operating forever.

c) Raising capital

A company can get a loan easily by issuing bond financing or debt financing. If company want to raising capital, they can issue bond publicly or sell shares of stock privately in their company.

2. What is IPO? What are the advantages and disadvantages of IPO to the football clubs?

IPO stands for Initial Public Offering. IPO refers to the process that private company is listed their share to public at the first time. Companies can increase the equity capital by issuing new shares to public.

Advantages of IPO to the football clubs:

Raising capital

When the football clubs listed their shares to public, this will help raising the club's equity capital. The football club can use lots of capital to help growth of club. Capital can use to expand the stadium of football, giving higher salaries as incentives to football player and provide several types of services to football club users.

Reduce the debt

Football club listed their shares to public can reduce the debt of club. Successful public company can reducing the levels of debt, therefore, club can making interest payments. The additional profit will make the club without incurring any burdens to provide dividends to shareholders.

Player acquisition

Football club can use issues the fund by acquisition the talent player into the club. This will help to maintain competitiveness between club and other competitors. Higher incentives will attract talent player and football club can bidding at any price.

Disadvantages of IPO to the football clubs:

Higher cost

IPO need lots of work for club to become successfully. The football club leader will not be focus on their football business. It requires lots of costs and football club need to hire an investment bank as a consultant in guiding the club. The investment bank charges the hefty fees.

Reduce the shares on hand

IPO make the football club shareholders unable to own more shares compared to prior. This is because the club will add other new shareholders contribute their money to club. The original shareholders might put more money into football club if they want to increase the percentage of share on hand.

Stock price decreasing

Issuing large shares and selling these shares to public investor will reduce the price of share of football club. The original shareholders will lack of confidence and they will take back their funds and invest to other company.

Losing ownership control

Owner of football club will losing their ownership control because the Board of Director have power to fire owner. Board of Director can discuss and hiring the new owner as the leader in football club.

3. How do financial markets in general benefit an economy?

Financial markets can benefit an economy in the form of liquidity, smoothing consumption, risk sharing and efficiency in resources allocation.

Liquidity

Financial markets can benefit economy by providinggreater liquidityand it can allow individual or corporation to invest in projects with a broader variety of time horizons until the projects are being completed. Without the conformation of financial markets, only people with very low time preferences would be capable to apply any loans.Supposed there is no any secondary market that enable us to offer the claim for the loan, the lender will essentially stuck in the time horizon of the project.

The same will go for equity. If individuals need to keep equity for 20 years, many people would not buy it. But for firms to fund thirty years or longer projects through bond financing if there is market for these bonds to be traded, it will become more efficient. This is because there is no necessary time span consistency between savers and investors. Financial markets offer financing for long-term projects by buying and selling bonds and equities. This cause savers to be more likely to purchase in long term investments.

Smoothing Consumption

Financial markets can also benefit the economy by smoothing our consumption. The total amount that we consume every period is different from the total amount we earn. So, we need a mechanism to maintain our constant or improving quality of life. Financial products or services enable us to realize this objective. When our salary goes beyond the amount we consume, we can preserve and turn our purchasing power to the future. We can also use the money from our savings during the time when our salary is lesser than consumption needs such as paying our kids college tuition fees, and down payment for buying a house. In general, by using this process, we will be able to smooth our spending throughout our lifetime and increase our happiness.

Risk Sharing

In addition, financial markets can allow risk sharing. People around the world would be able to share the risks they are facing with others over the world. To stimulate risk sharing, financial instruments are established and traded. In return, the whole society will be better off. When the financial products and services do not exist, government and other private or public agencies are trying to involve in and facilitate risk sharing.

Financial markets help us to deal with some uncertaintythat is intrinsic for projects investing. For a given return, some individuals will prefer less risk than more risk projects. Insurance company is one of the typical financial markets that help to assist in risk sharing. It can be realized by the probability density function known by empirical evidence. Individuals having same attributes or opinions can gather their resources to insure them against catastrophic loss, for instance, a tornado. Nobody from middle-class could insure themselves against catastrophic loss because the asset owned by them is more than their yearly salary. Therefore, instead of people bearing it individually, risk has been shared over a large group of people via insurance markets that deal with class probability

Efficiency in Resources Allocation

Financial markets also allow us to increase efficiency in allocating resources. Financial markets offer for the efficient resources allocation within the entire economy. Financial markets offer some assurance to participants that they will be treated comparatively and honestly via organized and regulated exchanges, Financial markets offer firms and governmental entities to easily access to capital. They also offer employment to people who work in the financial industry.

Resources are gathered from individuals who have excess money and distributed to firms that have good ideas and could use those resources in a generative manner through financial intermediaries. This kind of efficient resources allocation would stimulate economic growth.

4. Elaborate FIVE (5) differences between stock financing and bond financing.

Bond Financing (Bondholder)

Feature

Stock Financing (Shareholder)

Creditorship

Owners

Ownership

Bondholders are lenders to the issuer

Holders

The stockholders own a part of the issuing company

Interest rate

Type of Payment

Dividend

Public

Issued by

Corporation (private)

Yield to maturity, nominal yield, current yield, or bond duration

Yield Analysis

Dividend yield

Less risky

Risk Exposure

Riskier

Higher priority

Priority of Repayment

Lower priority

Constant

Periodic Payment

Flexible

Doesn't have power to vote

Voting Right

Have power to elect Board of Director

Investors, speculators

Participants

Market maker, floor trader

Does not have a central trading place

Centralization

Have a centralized exchange or trading system

In the financial market, there are two kinds of securities issued by corporations which are bond financing and stock financing. Bond financing can be defined as a fixed income investment in which an investor borrows money to corporation or government. For example, when a corporation lends money to finance its business through the sale of bonds, corporation will agree to repay investors or creditors loan within a specific time and makes coupon payments to its investors as an incentive (Zack Investment Research). However, stock financing can be defined as a type of security that signifies ownership in a corporation. Both financing is representing different ways to raise money to expand their business. Generally, there are five differences between stock financing and bond financing such as:

a) Voting Rights

Shareholder has a power to elect Board of Directors and participate into other issues in corporation, but bondholder or creditors do not have voting rights because it's not an ownership interest.

b) Type of payment.

Dividend is a payment made by corporation to shareholders as a distribution of profits. Normally, distribution to shareholder maybe in cash or deposit into a bank account. Besides, shareholder also can reinvest the dividend into share if the corporation has open a dividend investment plan. On the contrary, coupon payment will pay by corporation to bondholder periodically. The coupon rate of bond is expressed in annual terms and coupon rate is the dollar amount of interest paid to bondholders.

c) Periodic Payment

For stock financing, periodic of payment are flexible, it's depends to corporation either gain profits or not after-tax deductible all the business expenses. However, for bond financing, bondholder have higher priority to get back repayment. It is because coupon payment or interest is considered as a cost of doing business and is tax deductible; so, bondholder is categories into debt.

d) Priority of Repayment

Shareholder does not have higher priority to get back repayment compares to bondholder; all the debt of corporation should be pay back to investors or stakeholder first before pay to shareholders. However, bondholder have higher priority to get back repayment periodically.

e) Centralization

Stock financing have a centralization exchange or trading system compared to bond financing which does not have a central trading place and typically is sold mainly over-the-counter (OTC). Usually, bond financing is issued by corporation to public market compared to stock financing which is issued privately in their corporation. Bondholders have legal recourse if interest or principal payments are missed but shareholders have no legal recourse if dividends are not paid it is because dividends are not considered a cost.

5. Explain the statement markets enable the separation of ownership and management of the corporation, allowing an optimal allocation of scarce resources.

This statement shows that the publicly listed corporation in which the owners of the football club have no direct or few powers to control over decisions of management that allow the corporation to allocate the optimal amount of scarce resources that will increase the value of public listed corporation or maximize the wealth of shareholders.

In the 21st century, there are many corporations owned by larger number of shareholders. As a matter of fact, a corporation may be owned by the million or a billion shareholders. The corporation can be easier to raise up the huge capital from the shareholders. Concept, of separation the ownership from the management was the idea of the America's largest corporation. The owners of the football club have separate from the corporation's management that they do not have or little right to control the decisions of management. The reason is the shareholders of football club basically do not understand or master the management knowledge to manage the operation of the football club. Consequently, the shareholders of football club will vote the board of directors (BOD), who in turn to set up the top management to make and implementing the football club's business policy. However, once the shareholders of football club are unhappy with the performance of management team, they can exert the powerful right which is proxy fight to change the board of directors and top management team.

There are several rights as the football club's shareholders. Firstly, the shareholders have the right to transfer ownership which is the number of shares to other people. Second, they also have the voting right on some important issues such as merger with other football club or direction of football club. Besides, the shareholders have the legal right to sue the any wrongful acts contribute by the board of directors or the top management. Next, the existing shareholders also can buy the new number of shares that issue by the football club at the specific price. The specific price will always lower than the price that offered to first time buyers.

In the football club management structure, the top management layer is chairman and board of directors. The role of top management is responsible for overseeing the football club's long term strategic planning and short term daily operation. In addition, the board members also held the responsibility in the strategic planning, allocate the scarce resources and driving the transformation. Next, the second management layer is chief executive officer (CEO). The role of CEO is implement the long term strategic for the football club and CEO is assist by the different department officer.

The lack of professional managerial knowledge suggest that ownership should separation from the management in order allocate the limited resources in the optimal way. The growth of a football club is need the people whom have different skill or knowledge of management to manage the operation of the football club in the efficiency way. However, many of shareholders of football club lack of the professional managerial knowledge to make the best decisions and sometimes may made the wrongly decision for the football club. Therefore, they need to create the management team such as Board of director, CEO, and management team to make the best decisions for the football club.

The different opinions of the shareholders also suggest the ownership should be separate from the management. A football club is owned by million and many shareholders and it is very consuming the long time to proceed the decision-making process in case the shareholders have involved in the management of the football club. During that time, the scarce resources might not be allocating in the optimal way due to the different opinions of the shareholders on determine the allocation resources issues. Relatively, the shareholders are not involved in the management of football club and management system replace by hire the professional management team. Perhaps, the determination of allocation resources issues can be clearly and allocate it in the optimal way.

Lastly, separation the ownership and management can provide the better communication way from the top management level to bottom management level. The optimal allocation of the resources is determining by whether the instructions given are clear or not. If, the large number of shareholders are involved in the management of football club, the instruction might confuse the employees. However, the owners of the football club have no direct or few powers to control over decisions of management that allow the CEO to give clear instruction to managers due to the CEO will be the only person that have the right to give the instruction. The CEO can allocate the resources in the optimal way due to the he or she knows which department is need more the resources or allocate less resources to the department that really do not need the resources.

6. Do you think a football club can benefit from a stock market listing? How? If not, why?

I think that a football club can benefit from a stock market listing, this is because it is a way to raise capital. For example, during 1990 and 2000, most of the football club are floating themselves in the stock market to raise capital. This is a famous trend among them. In general, the stock price is depending on their competition performance. Once a football club win a competition or match, their stock price will increase. Same things go here, if they lose the game or match, their stock price will drop significantly. In some special case, most of the football club stock is illiquid and stagnant. Most of them are trying to emerge into growing business and going public to liquid their stock. Although several football club listed as public but still less people willing to buy the stock as they think that the stock is not as glamorous as it sounds. In other way round, some famous football club manage to maintain their good performance and thus increase their stock price. Most of the people will goes for this type of stock. For example, Manchester United is the largest football club that listed in public. Manchester United manage to attract many investors to buy their stock because they have maintained their good performance. Manchester United stock are traded in New York Stock Exchange. New York Stock Exchange is the largest exchange in the world. Manchester United is the most famous and successful club that able to maintain their stock market performance. Some of the football club do not really perform well and this affect the investor not to invest in football club stock market. Everything has both side either positive or negative. For example, although most of the football club do not really perform well and this affect the investor not to invest in their stock market while Manchester United manage to maintain their good performance and successfully attract investors to invest in their stock. This have mark the turns point in football club stock exchange market. So, I think that football club really can be benefit from a stock market listing and the only way to success is by maintaining their good performance.

7. Explain the factors that contribute to the increment in the football clubs' stock price.

8. Suggest other alternatives modes of financing for football clubs.

Other alternatives modes of financing for football clubs are sponsorship, loans, strategic partners and over-category investor financing.

Sponsorship

Football clubs can get financed through sponsorship by other big companies. Sponsorship, advertising earnings in prospect and especially their development are hard to predict. The primary elements of this earnings are t-shirt, logo adoptions and banner adverts. Naturally, in worldly championship there are expiring agreements that supposed to replace. In a recession economic circumstances, this could be reason of critical problems. Professional marketing intermediaries must be hired to be involved in concluding sponsorship contracts and seeking for sponsors. Agreements between such sales professionals and clubs usually include warranty provisions for cases where the look for sponsors does not go as anticipated or is not realized at all. Failure fee normally is paid by the marketing intermediaries. Incomes can be optimized while losses are reduced by implementing the above-mentioned methods. Contrast to clubs of great European footballing nations, German clubs yield conspicuously more earnings from this source. Thus, market researchers carried on in Germany are discovering the saturation of the market.

Loans

External financing chances need to be think over beginning with outside financing, carried on by patronage and own financing. For football clubs external financing frequently implies loans, considering particularly that several clubs cut themselves from alternative financing suggests simply by selecting a legal form that avoids them from utilizing such financing options. Because of the transforming framework circumstances applicable to the acquisition of outside capital, football clubs must switch to borrowing which is based on even more comprehensive credit assessments. This might stand for significantly degenerating credit conditions and possible effect loan applications being rejected for some clubs, especially for those whose financial position is not steady. Only football clubs that can emerge considerable economic consequences may proceed to expect better conditions and yield profits due to their credit rating. This is where external credit ratings would be extremely beneficial. In many countries, the creditworthiness and outcomes of licensed leagues are experiencing a welcome improvement. Bond issue is a feasible option for those clubs, whose economic outcomes are sufficient and whose legal form permits them to issue bonds.

Strategic partners

When it takes place on own financing, the one first must be mentioned is strategic partners. Instead of concentrating on yields alone, the football club can be based on an extraordinary combination of business profit and interest, which is founded in adopting the synergies that exist between business enterprises and football clubs. Regarding realizing positive effects, the prerequisite among from others is the harsh intangible outcome of the football club, in which the partner can adopt for economic objectives. The partner investor must be ensured appropriate information, supervision and intervention rights as it has a specific share in the football clubs. In addition to this, under certain situations, some structural changes of the football clubs are also important in the interest of the adopting of this capital fund. Football clubs can obtain own funds by involving further investors such as private equity or through capital raise, by building only on the confidence of investors already on board. This is an over-the-counter procedure.

Over-category investor financing

Regarding over-category investor financing, the investors' powerful intervention into the general affairs of the football clubs is extremely typical. The restrictions of freedom deciding in this example are tremendously high, since further sections and authorities of the football clubs are outsourced yet partially turned over to investors, thus vulnerability to investors and a quasi-economic exposure is realized. Based on currently existing intangible outcomes at that time, the football clubs primarily receive expert and professional guidance and assistance in every sales aspect, and secondly especially in lowering divisions, it obtains extremely high level supplementary financing, which must be materialize in future sports outcomes at an early date. Therefore, both partners which primarily the investor can gain earnings from positive and active economic effects. According to this solution, the football clubs must accomplish good and excellent sports outcomes in the future as well, since the possibility of investors leaving, bankruptcy or insolvency is extraordinary high. Hence, the risk of this capital fund is extremely high.

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