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Business Entity Essay

The University of Phoenix is the virtual organization I have selected, for the purpose of examination of which method of obtaining financial aid would be most appropriate for the university. Currently, the organization is a private company which is looking for opportunities for expansion. The three methods of obtaining financial assistance we will focus on are attaining finance through the company going public, acquiring another company or through a merger.

If the university decides on equity funding the investors will become partners in the business, they will have a share in the profit as per their investment ratio. If this mode of obtaining finance by the company is chosen the company will have to give the investors dividends, that is, a share of the company’s profit. Additionally gathering finance through equity financing has a lot of setbacks as, legal issues have to be kept in mind, also the key insights of the business have to be discussed with the investors and their suggestions have to be considered as well.

This may slow down the process of making decisions and conflict may arise because the aim of the shareholders and that of the company’s owner will be different from each other. Both will

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want to maximize their own profit. For instance, in the owner’s opinion the company’s priority should be in trying to expand its business; however the share holders would want immediate short term gains of their investments.

This process of raising finance takes plenty of time as a lot of paper work has to be done in order to be declared as a public limited company and before the pubic can be invited to purchase the shares of the company. Hence if the company wants to finance its business through this way it will have to quickly start the process before the competitor gets way ahead of the company.

Strength to this mode of funding is that when the company suffers losses, the shareholders will also share this loss with the company; therefore the burden of loss is divided amongst many people instead of only one being burdened on one shoulder. More over after the issuance of an IPO the company dept to equity ratio gets better and it becomes easier for the company to attain financing on the basis of loans too. A company can have the shares of its company as the collateral part and can use them to attain further financing, which means an opportunity for further growth is present by the company.

If the university opts for mergers as the way to attain finance, the strength it will get is economies of scale as it will enable the university to share its headquarters with the other university. Further more the admission costs of students, hiring costs of staff, marketing costs can be greatly reduced as a result of a merger. Additionally the power factor that will be gained by joining hands with another reputable university will be immense; the company will be able to cope up with competition from other universities both locally and internationally.

The university will become more efficient as by using less resources the company will be able to generate more revenue. As more profits will be generated as the costs have been cut down through a merger, the university will look towards further improving the condition and services the university offers. This means better quality for the customers, leading to more customers being attracted to join the university. Also due to the merger, the university will have an increased market share and a superior public profile.

This technique of growth can lead to conflict of interest amongst the staff members as the dissimilar culture of the universities can lead to the staff and students being working towards different objectives. Usually in a merger a lot of staff is laid off which greatly reduces the motivation factor of the employees, as the jobs are at stake, Additionally ample of money is spent during the merger and if it proves to be unsuccessful that means significant losses to the organization and a stain on the reputation of the company in the eyes of the world.

Acquisitions usually take place when a large organization takes over a small one, if the University of Phoenix looks at acquiring a smaller university it can the position of the university in the mind of the customer will be better than before in term of competency. Moreover the smaller company usually agrees to be acquired by the large company to be saved from the crisis they are stuck in; this enables the company to have a greater market share.

As in the case of mergers the ownership of the company is not diluted in an acquisition, which means that after acquiring another university the organization will not feel the ownership being divided. Additionally if a rival is taken over the competition of the university is eliminated, which strengthens the position of the organization. The management team that will be formulated after the acquisition will be more competitive and viable. Additionally the well known professors of the acquired university can enhance the image of the university.

The acquisition leads to difficulties in integrating the two companies as the human resource side and technical side is difficult to integrate and manage successfully. More over if the organization takes a hostile takeover it gives a bad reputation to the company. Most of the time it is observed that the productivity of the company is decreased significantly due to acquisitions, as the staff is unable to deliver the way they previously did. It is also noted that the turnover rates of top executives increase drastically after a take over is done.

In my opinion the company should go with the strategy of going public as a strategy for external financing.  If the university considers this mode of external financing, it will spread out the risk factor across the investors. That is they will also share the losses with the organization. Additionally, mainly, because this strategy will not lead to difficulties in managing the human resource of the organization as opposed to Mergers and Acquisitions which lead the staff to be de motivated and distracted. Additionally through going public the company can continuously raise capital when ever it feels the requirement for further growth and expansion.

References:

http://www.aicpa.org/pubs/jofa/nov2002/mastra.htm

http://www.investopedia.com/terms/i/ipo.asp 

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1311

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