At first sight it might seem a fair transaction. We need, however, more information to establish if it is, in fact, one. If, for example, Esedra had some other investment opportunities with a higher ROI, this transaction would be damaging the minority shareholders of Esedra.
I agree with you Agnese. But we may observe that Targetti is commanding a transaction (that seems fair enough by only looking at the mkt price) from one of its subsidiaries to a natural person (which is OUTSIDE the boundaries of the group in terms of profit, investments, resposibility) and, above all, its UCP. It sounds ironic to me. Fair or not, money are temporarily going out from the hands of Targetti's minority shareholders and creditors. I bet they are not so happy about that! how high could be a ROI for a sum flowing out from a company and reaching a natural person?
In my opinion, whether or not against the law, this transaction sees the holding co. Targetti as responsible for. Hence, it is in its own interest that the operation is fair.
Even if the interest rate is in line with the market conditions, we might have tunnelling. Because we have to at certain motivations or other alternatives.
I agree with you guys. We don't have enough information to asses whether this is a fair or unfair transaction.We should collect info so that to state if Esedra could have obtained a higher ROI by investing its money in another more profitable transaction than the one involving mr Targetti. However I think there is a good chance that money could have been spent in a better way.
i'm totally aligned with you! the markep price is not enough to justify the fairness of this transaction. We should know which are the motivatons and, as you said before, we should check if esedra had better investments opportunities, since in that case minor shareholders of ESEDRA would be damaged from this transaction!
We don't know if it is a fair or unfair transaction even if these transactions are align with the market price. Let's look at the motivations of transaction. In this case we have to consider the financial income and check if Esedra had better investment opportunities. This transaction is not in the interest of the company bacause you can have this possibility to invest money in other more profitable transaction, demagind the minority shareholders of Esedra.
For sure we can say that if Esedra has the possibility to invest its financial resources in better investment opportunities, the transaction would be detrimental for its minor shareholders.
If on one hand we observe that the paid interest rate is in line with the market, on the other hand we have to take into account that Esedra could have invested the same amount in a more profitable asset. If the second situation occurred, the imposed lend would be detrimental to Esedra in advantage to Giampaolo Targetti.
Even if the price is aligned with the market, we could be in a case of tunelling since the money that the company lent to Giampaolo Targetti could have been used in a more profitable way by Esedra.
I agree with you, the price does not need to be in line with the market to have the tunneling. In fact, we have to consider the other investment opportunities that exist!
It's important to remember that even if the price is alligned with the market conditions, a transaction could be considered tunneling. The reason is that there could be the possibility that an alternative investment with an unrelated party could generate a ROI higher than the one generated by the transaction under analysis. In this case we should consider such a transaction detrimental.
I agree with my colleagues, we don't need to have necessarily a price not in line with the market conditions to have a case of tunneling. In fact, in this case we should take into account also that this company might have other investiment opportunities more convinient than lending the money to Giampaolo Targetti. Moreover, the resources aimed at financing this person, could be used in a more efficient way for the company: for example purchasing the necessary raw materials. For these reasons, this transaction could be detrimental for the company and for the minority shareholders, even if can be considered fair looking at the lending terms.
I agree with Federico. Even if the price is aligned with the one of the market, we can also have case of tunneling since we must consider the other investment opportunities in which a company can invest its money.
At first sight we can argue that the transaction is fair, but according to theory, even if the interest rate is aligned with the market price, we can find a tunneling case. All this money that the company lent to G. Traghetti could be invested by Essedra in other activities more profitable.
It depends on the opportunity cost of lending that money for Esedra. If Esedra could use that money for investments with an higher rate of return, this transaction would be detrimental for them
Before to judje this operation we should find out if there are more profitable investment that Esedra could make. If yes, this operation may be considered as detrimental for Esedra. However, if we take into consideration the Business Group perspective this may be considered as a normal and common activity.
The point is that Esedra could invest that amount of money in an other way and get an higher return ( 6% for istance). So, this transaction is not in the interest of the firm.
as the others said, here firms doesn't seem to act throught tunneling nor propping, but the fact is that you should go more in to the deeper and analyze if there are other "opportunity costs" for Esedra that could consider more advantageous respect to lend money at a fair price. The accounting index of ROI is useful to understand how they are acting.
I agree with you Arianna, the investments that ESEDRA is not doing, lending money to Targetti, must be considered as a cost and in this sense, they could be detrimental for minor shareholders of ESEDRA!
Using the Conflict of interest theory it could be tunneling even if the price is in line with the market price. Indeed we have to consider the opportunity cost of, for example, investing that money in a way that generates a ROI greater than 4%.
In this case we this transaction may seem right and aligned to the market price. But we have to consider that an investment of the same amount of money can generate an ROI higher than 4%
Knowing that when ROI is higher than the interest rate it is better to increase the debt, we have to consider all the possibilities and opportunities of an alternative investment with an unrelated party to say if this transaction is fair or not. That's why it may be tunneling.
UCP of Targetti commands Targetti itself to transfer money from one of its subsidiaries to UCP himself. We may call it tunnelling, fraud, suspicious maneuver.. in any case the market price alignment is the last thing shareholders should care about in this transaction.
So, as the CEO of Esedra, i will consider the interests of the investment (4%) in the income statement. The problem is that I could invest the money in an alternative way, having a ROI equal to 6%. So, this transaction it's not in the interest of the company because I could have this possibility.
I totally agree because when we consider a transaction in a business group we have always to take into consideration if there is a compensatory advantage for the company that appears to be demaged.
Or in the case of propping we could also expect future transactions in the opposite way, so that the party who was damaged before get some benefit in the future!
I don't think it should be considered as a fair transaction because even if the price is aligned with the market conditions, the transaction should be considered tunnelling because Esedra could have the chance to make another type of investment and generating a higher ROI than the one generated by this transaction.
I agree with all of you,the market price is not enough in order to state if it is a fair transaction or not. In this case we need to analyze the ROI in order to understand if Esedra could have the possibility to make a more profitable investment.
In my opinion, whenever we have a transaction with an unrelated party, it is not enough to judge the goodness of the transaction only from the interest rate point of view. Indeed, even though it is in line with market conditions, the transaction may be not fair. Instead, it is important to look at the return on investment of it and at the same time of other alternative investments.
I agree with Michele, Business Group perspective cannot be considered in this case. Moreover, if Esedra declares not to be directed by Targetti, the holding will be no longer responsible for the damages that Esedra, with its actions, may cause to others.
in that particular situation, I think that we could not use the business group perspective in order to interpret this transaction. Therefore, we could rely only on the conflict of interest perspective.
In my opinion, i prefer the situation when the firm declare that they are directed by the holding company. Because in this case, the Board of Directors are more responsible for the internal transactions
If Esedra declares not to be directed by Targetti it comes to be the only responsible for the outcome of the transaction involving mr Targetti.Therefore the holding in no liable for probable demages caused to ESedra shareholders any more
According to me Esedra is not really reliable in doing such a declaration, given the very high level of cash flow rights and control rights that targetti owns in esedra, so that, being Targetti the majority shareholder, it has the possibility to appoint and dominate the majority of the BoD of ESEDRA.
I agree with you guys in this case a transaction could be considered as tunneling, for this reason we have to consider the other investment opportunities of the same amount of money can generate the Return on investment higher than 4%.
I agree with Federica ,the market price is not enough in order to state if it is a fair transaction or not. In this case we need to analyze the ROI in order to understand if Esedra could have the possibility to make a more profitable investment.
hii guys, if Targetti orders Targetti Bv (Olanda) to lend money toTargetti Ilumination Sa (Spagna) the interest rate is higher than the fair market conditions. How do you interpret such transaction?
I believe this situation could be considered as propping, as Targetti wouldn't get cash flow benefits from the transaction as it has the same cash flow rights on the two companies. However this situation, in my opinion, is quite unlikely to happen. In fact, if Targhetti Bv were in a troubled financial position, it wouldn't probably be wise to deprive it of liquidity, even though at a favourable interest rate. Thus it would be propping in a particular combination in which Targhetti Bv were in a difficult situation, but at the same time had an excess of liquidity.
In this case, the Targetti holding company own 100% cash flow right in Targetti Bv (Olanda) and Targetti Ilumination Sa (Spagna), thus, there is no motivation for tunneling. We need more information to interpret such transaction. For example, if Targetti Ilumination Sa (Spagna) is in a financial trouble, they can not pay back bank debt and also can not borrow money at the market price, this transaction is good for both Targetti Ilumination Sa (Spagna) and Targetti Bv (Olanda) and also for the group.
I agree with the hypothesis of propping, I believe we should adopt a wider perspective though. Providing that these two firms involved in the trnsaction declare to be directed by Targetti , we can consider them as part of the entire business group, therefore the advantage that Targetti olanda is experiencing now, could be just counterbalanced by previuus advantages given from targetti olanda itself to targetti spain, or in could be just a transaction which in a specific economic period can lead to higher profits for the entire group.
thanks for your answers, guys how do you think if Targetti orders Targetti Bv (Olanda) to lend money to ESEDRA the interest rate is lower than the fair market conditions. How do you interpret such transaction?
It would be propping. The problem of this transaction is that it is detrimental for Targetti illumination (Spagna). It should demnostrate other benefits from its membership to the group.
I would opt for propping too. But it is difficult to say because if Targhetti Bv were in a troubled financial position, it wouldn't probably lend its money, even though at a favourable interest rate.
Just remember that in a situation like that, if Targetti owns both companies for 100%, we could not interpret it as tunneling. On the other hand, it could be propping, because investigating the reason why the Holding company is closing that transaction, we could understand that it may be the case that it helps a firm from financial distress.
I agree with you guys, but I would add that, in my opinion, in this case there is a damage to the other creditors of Targetti Illumination since it will have to pay an higher interest rate wasting its resources.
I think that if the transaction is made for free maybe is because Tivoli sells for free some other goods to Duratel. Under the business group perspective, we can say that this is a normal transaction within the group, made for the convenience of group itself.
The holding company have the same cash flow right in both subsidiaries, this is no motivation for tunnelling and propping. In this case, it is better if we use the business group perspective.
i think that it is just a normal transaction between firms inside a group because there isn't particular framework that could create problems of opportunism
At first sight it might seem a fair transaction. We need, however, more information to establish if it is, in fact, one. If, for example, Esedra had some other investment opportunities with a higher ROI, this transaction would be damaging the minority shareholders of Esedra.
ReplyDeleteI agree with you Agnese. But we may observe that Targetti is commanding a transaction (that seems fair enough by only looking at the mkt price) from one of its subsidiaries to a natural person (which is OUTSIDE the boundaries of the group in terms of profit, investments, resposibility) and, above all, its UCP. It sounds ironic to me. Fair or not, money are temporarily going out from the hands of Targetti's minority shareholders and creditors. I bet they are not so happy about that! how high could be a ROI for a sum flowing out from a company and reaching a natural person?
DeleteIn my opinion, whether or not against the law, this transaction sees the holding co. Targetti as responsible for. Hence, it is in its own interest that the operation is fair.
DeleteEven if the interest rate is in line with the market conditions, we might have tunnelling. Because we have to at certain motivations or other alternatives.
DeleteEven if the prices are going hand in hand with market, still there is tunnelling.
DeleteI agree with you guys. We don't have enough information to asses whether this is a fair or unfair transaction.We should collect info so that to state if Esedra could have obtained a higher ROI by investing its money in another more profitable transaction than the one involving mr Targetti. However I think there is a good chance that money could have been spent in a better way.
Deletei'm totally aligned with you! the markep price is not enough to justify the fairness of this transaction. We should know which are the motivatons and, as you said before, we should check if esedra had better investments opportunities, since in that case minor shareholders of ESEDRA would be damaged from this transaction!
DeleteWe don't know if it is a fair or unfair transaction even if these transactions are align with the market price.
DeleteLet's look at the motivations of transaction.
In this case we have to consider the financial income and check if Esedra had better investment opportunities.
This transaction is not in the interest of the company bacause you can have this possibility to invest money in other more profitable transaction, demagind the minority shareholders of Esedra.
For sure we can say that if Esedra has the possibility to invest its financial resources in better investment opportunities, the transaction would be detrimental for its minor shareholders.
DeleteI agree with you Agnese, we need more information to intepret this transaction
DeleteIf on one hand we observe that the paid interest rate is in line with the market, on the other hand we have to take into account that Esedra could have invested the same amount in a more profitable asset. If the second situation occurred, the imposed lend would be detrimental to Esedra in advantage to Giampaolo Targetti.
ReplyDeleteEven if the price is aligned with the market, we could be in a case of tunelling since the money that the company lent to Giampaolo Targetti could have been used in a more profitable way by Esedra.
ReplyDeleteI agree with you, the price does not need to be in line with the market to have the tunneling.
DeleteIn fact, we have to consider the other investment opportunities that exist!
I agree with Claudia Arriga, it is the tunneling, we have to look at the opportunity cost of the investment
DeleteIt's important to remember that even if the price is alligned with the market conditions, a transaction could be considered tunneling. The reason is that there could be the possibility that an alternative investment with an unrelated party could generate a ROI higher than the one generated by the transaction under analysis. In this case we should consider such a transaction detrimental.
ReplyDeleteI also think that it is a tunneling, even if the price in related to market. Minority shareholders of of Esedra are in demage for sure.
DeleteI agree with my colleagues, we don't need to have necessarily a price not in line with the market conditions to have a case of tunneling. In fact, in this case we should take into account also that this company might have other investiment opportunities more convinient than lending the money to Giampaolo Targetti. Moreover, the resources aimed at financing this person, could be used in a more efficient way for the company: for example purchasing the necessary raw materials. For these reasons, this transaction could be detrimental for the company and for the minority shareholders, even if can be considered fair looking at the lending terms.
ReplyDeleteI agree with Federico. Even if the price is aligned with the one of the market, we can also have case of tunneling since we must consider the other investment opportunities in which a company can invest its money.
DeleteAt first sight we can argue that the transaction is fair, but according to theory, even if the interest rate is aligned with the market price, we can find a tunneling case. All this money that the company lent to G. Traghetti could be invested by Essedra in other activities more profitable.
ReplyDeleteIt depends on the opportunity cost of lending that money for Esedra. If Esedra could use that money for investments with an higher rate of return, this transaction would be detrimental for them
ReplyDeleteBefore to judje this operation we should find out if there are more profitable investment that Esedra could make. If yes, this operation may be considered as detrimental for Esedra. However, if we take into consideration the Business Group perspective this may be considered as a normal and common activity.
ReplyDeleteThe point is that Esedra could invest that amount of money in an other way and get an higher return ( 6% for istance). So, this transaction is not in the interest of the firm.
ReplyDeleteIt s not enought to focus on prices. If ROI > i the transaction is detrimental in terms of opportunity cost.
ReplyDeleteas the others said, here firms doesn't seem to act throught tunneling nor propping, but the fact is that you should go more in to the deeper and analyze if there are other "opportunity costs" for Esedra that could consider more advantageous respect to lend money at a fair price. The accounting index of ROI is useful to understand how they are acting.
ReplyDeleteIt could be tunneling , We have to look at the opportunity cost of the investment.
ReplyDeleteI agree with you Arianna, the investments that ESEDRA is not doing, lending money to Targetti, must be considered as a cost and in this sense, they could be detrimental for minor shareholders of ESEDRA!
DeleteUsing the Conflict of interest theory it could be tunneling even if the price is in line with the market price. Indeed we have to consider the opportunity cost of, for example, investing that money in a way that generates a ROI greater than 4%.
ReplyDeleteIn this case we this transaction may seem right and aligned to the market price. But we have to consider that an investment of the same amount of money can generate an ROI higher than 4%
ReplyDeleteKnowing that when ROI is higher than the interest rate it is better to increase the debt, we have to consider all the possibilities and opportunities of an alternative investment with an unrelated party to say if this transaction is fair or not.
ReplyDeleteThat's why it may be tunneling.
To me, it's not enough to know that interest rate is aligned with the market price... opportunity costs usually are higher than that simple index!
ReplyDeleteUCP of Targetti commands Targetti itself to transfer money from one of its subsidiaries to UCP himself. We may call it tunnelling, fraud, suspicious maneuver.. in any case the market price alignment is the last thing shareholders should care about in this transaction.
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ReplyDeleteSo, as the CEO of Esedra, i will consider the interests of the investment (4%) in the income statement. The problem is that I could invest the money in an alternative way, having a ROI equal to 6%. So, this transaction it's not in the interest of the company because I could have this possibility.
ReplyDeleteI totally agree because when we consider a transaction in a business group we have always to take into consideration if there is a compensatory advantage for the company that appears to be demaged.
ReplyDeleteOr in the case of propping we could also expect future transactions in the opposite way, so that the party who was damaged before get some benefit in the future!
DeleteI don't think it should be considered as a fair transaction because even if the price is aligned with the market conditions, the transaction should be considered tunnelling because Esedra could have the chance to make another type of investment and generating a higher ROI than the one generated by this transaction.
ReplyDeleteI agree with all of you,the market price is not enough in order to state if it is a fair transaction or not. In this case we need to analyze the ROI in order to understand if Esedra could have the possibility to make a more profitable investment.
ReplyDeleteIn my opinion, whenever we have a transaction with an unrelated party, it is not enough to judge the goodness of the transaction only from the interest rate point of view. Indeed, even though it is in line with market conditions, the transaction may be not fair. Instead, it is important to look at the return on investment of it and at the same time of other alternative investments.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteWhat if Esedra declares not to be directed by Targetti? How are shared responsibilities now?
ReplyDeleteI believe that if Targetti delegates the direction activity to Esedra, then we cannot use the Business Group perspective!
DeleteI agree with Michele, Business Group perspective cannot be considered in this case. Moreover, if Esedra declares not to be directed by Targetti, the holding will be no longer responsible for the damages that Esedra, with its actions, may cause to others.
DeleteI agree with my colleagues, if this new situation occurred we wouldn't be able to refer to the business group perspective.
Deletein that particular situation, I think that we could not use the business group perspective in order to interpret this transaction. Therefore, we could rely only on the conflict of interest perspective.
DeleteIn that case we cannot use the Busibess Group perspective. Targetti has a limited responsability for what concerns the Esedra actions.
DeleteIn this case, we will only refer to the conflict of interest perspective.
DeleteIn our case, we can't use the business perspective approach, only refer to the conflict of interest perspective
DeleteIn my opinion, i prefer the situation when the firm declare that they are directed by the holding company. Because in this case, the Board of Directors are more responsible for the internal transactions
DeleteIf Esedra declares not to be directed by Targetti it comes to be the only responsible for the outcome of the transaction involving mr Targetti.Therefore the holding in no liable for probable demages caused to ESedra shareholders any more
DeleteAccording to me Esedra is not really reliable in doing such a declaration, given the very high level of cash flow rights and control rights that targetti owns in esedra, so that, being Targetti the majority shareholder, it has the possibility to appoint and dominate the majority of the BoD of ESEDRA.
DeleteI agree with you guys in this case a transaction could be considered as tunneling, for this reason we have to consider the other investment opportunities of the same amount of money can generate the Return on investment higher than 4%.
ReplyDeleteI agree with Federica ,the market price is not enough in order to state if it is a fair transaction or not. In this case we need to analyze the ROI in order to understand if Esedra could have the possibility to make a more profitable investment.
ReplyDeletehii guys, if Targetti orders Targetti Bv (Olanda) to lend money toTargetti Ilumination Sa (Spagna) the interest rate is higher than the fair market conditions. How do you interpret such transaction?
ReplyDeleteI believe this situation could be considered as propping, as Targetti wouldn't get cash flow benefits from the transaction as it has the same cash flow rights on the two companies. However this situation, in my opinion, is quite unlikely to happen. In fact, if Targhetti Bv were in a troubled financial position, it wouldn't probably be wise to deprive it of liquidity, even though at a favourable interest rate. Thus it would be propping in a particular combination in which Targhetti Bv were in a difficult situation, but at the same time had an excess of liquidity.
DeleteI consider this as propping, because both have 100% od cash flows, so something is fishy in this transaction
DeleteTunnelling, because both have 100% of cash flows, so it's useless to do this transaction. Something wrong might come out of it.
DeleteIn this case, the Targetti holding company own 100% cash flow right in Targetti Bv (Olanda) and Targetti Ilumination Sa (Spagna), thus, there is no motivation for tunneling. We need more information to interpret such transaction. For example, if Targetti Ilumination Sa (Spagna) is in a financial trouble, they can not pay back bank debt and also can not borrow money at the market price, this transaction is good for both Targetti Ilumination Sa (Spagna) and Targetti Bv (Olanda) and also for the group.
DeleteThere is no evidence of tunneling here since the holding Targetti owns both firms for 100%. Therefore, I would opt for propping.
DeleteI agree with the hypothesis of propping, I believe we should adopt a wider perspective though. Providing that these two firms involved in the trnsaction declare to be directed by Targetti , we can consider them as part of the entire business group, therefore the advantage that Targetti olanda is experiencing now, could be just counterbalanced by previuus advantages given from targetti olanda itself to targetti spain, or in could be just a transaction which in a specific economic period can lead to higher profits for the entire group.
Deletethanks for your answers, guys how do you think if Targetti orders Targetti Bv (Olanda) to lend money to ESEDRA the interest rate is lower than the fair market conditions. How do you interpret such transaction?
DeleteIt would be propping. The problem of this transaction is that it is detrimental for Targetti illumination (Spagna). It should demnostrate other benefits from its membership to the group.
DeleteI would opt for propping too. But it is difficult to say because if Targhetti Bv were in a troubled financial position, it wouldn't probably lend its money, even though at a favourable interest rate.
DeleteJust remember that in a situation like that, if Targetti owns both companies for 100%, we could not interpret it as tunneling. On the other hand, it could be propping, because investigating the reason why the Holding company is closing that transaction, we could understand that it may be the case that it helps a firm from financial distress.
DeleteI agree with you guys, but I would add that, in my opinion, in this case there is a damage to the other creditors of Targetti Illumination since it will have to pay an higher interest rate wasting its resources.
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ReplyDeleteDuratel sells good and services to Tivoli for free. How do you interpret this situation with the business group prespective?
ReplyDeleteI think that if the transaction is made for free maybe is because Tivoli sells for free some other goods to Duratel. Under the business group perspective, we can say that this is a normal transaction within the group, made for the convenience of group itself.
DeleteThe holding company have the same cash flow right in both subsidiaries, this is no motivation for tunnelling and propping. In this case, it is better if we use the business group perspective.
Deletei think that it is just a normal transaction between firms inside a group because there isn't particular framework that could create problems of opportunism
ReplyDelete