1 corporate results Investors typically have an inclination to buy either stocks or bonds, but rarely make a choice between

the two. After finding a company that looks like a good investment candidate and getting to know the business and the financials, investors should make a choice about which type of investment to make. Stocks are investments in which the investor takes an ownership interest in the corporation. Bonds allow investors to lend money to the corporation and receive interest. Let's take a look at how these very different investments are affected by corporate events. Stocks Stockholders own a share of the company in which they are invested. Stocks are traded on an exchange and prices are set by the market. Stock prices are typically driven by financial results, company news and industry fundamentals. They are usually valued on a "multiple" basis. Stock investors generally invest in companies that they feel have superior growth prospects and are undervalued by the market. While the market sets the prices and no one shareholder should be able to influence prices, stockholders have a way of influencing management and company decisions via proxy voting. Stockholders only receive "payment" for their investment when the stock price increases or dividends are paid. (To learn more, check out What Owning A Stock Actually Means.)

Bonds Bondholders differ from stockholders because they do not have any ownership stake in the company. Instead, bondholders essentially lend a corporation money under a set of rules/objectives (covenants) the company needs to follow to maintain good standing with the bondholder. Once the bond matures, bondholders receive the principal investment back from the company. In the meantime, they receive coupon, or interest, payments on the bond (usually semiannually).

Bonds are traded in the bond market and prices are set by the market based on the financial fundamentals of the company issuing the bonds (most notably the strength of a companys balance sheet and the ability of the company to pay its obligations). Bonds have an inverse price and yield relationship, such that bonds sell at a premium when they are less risky (meaning the coupon is low) and at a discount when the risk is higher. The principal does not deviate and is therefore called the face value, but the coupon and price do change based on perceived financial strength and investors expectations about the company.

Bonds are rated by rating agencies (Standard & Poor's, Moody's, Fitch) based on their characteristics. When any of these agencies changes its rating, market prices fluctuate. Therefore, bonds are also subject to market speculation of rating changes. Investment grade bonds are generally considered safe from financial failure, while high-yield bonds are much riskier. (To learn more, see our Bond Basics Tutorial.)

Stock or Bond Investment? Companies face many decisions that affect investors. One of the greatest conflicts between investors and companies is that what is good for one stakeholder may not be good for the other. Let's take a look at some situations that may benefit or hurt stock and bondholders' positions.

Situation 1: A Company Borrows Money to Expand When a company borrows money, stockholders' earnings per share (EPS) is negatively affected by the interest the company will have to pay on the borrowed funds. However, borrowed funds do not dilute stockholders' holdings by increasing shares outstanding and may benefit from increased sales revenue from the expansion. Bondholders, on the other hand, may face a decline in the value of their investment as the company's perceived risk increases as a result of its increased debt load. Risk increases, in part, because the debt could make it harder for the company to pay its obligation to bondholders. Therefore, under a typical scenario, stock prices will be less affected than bonds when a company borrows money.

Company Buys Back Stocks When a company announces a stock buyback, stockholders are generally pleased by this announcement. That is because stock buybacks reduce shares outstanding so the profit is spread among fewer shares resulting in higher EPS for each share and, in general, a higher stock price. On the other hand, bondholders are usually not happy with this type of announcement as it cuts the company's cash on hand and reduces the attractiveness of the balance sheet. Therefore, under a typical scenario, stock prices will generally react more positively than bond prices. Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings and, even worse, a signal that the company has run out of good ideas. This means that investors can't afford to take buybacks at face value. Find out how to examine whether a buyback represents a strategic move by a company or a desperate one. When Buybacks Work A share buyback happens when a company purchases and retires some of its outstanding shares. This can be a great thing for shareholders because after the share buyback, they will own a bigger portion of the company, and therefore a bigger portion of its cash flow and earnings.

In theory, management will pursue share buybacks because they offer the greatest potential return for shareholders - a better return than it could get from expanding operations into new markets, investing in the brand or any of the other uses that the company has for cash. If a company with the potential to use cash to pursue operational expansion chooses instead to buy back its stock, then it could be a sign that the shares are undervalued. The signal is even stronger if top managers are buying up stock for themselves. (To learn more, read How Buybacks Warp The Price-To-Book Ratio.)

Most importantly, share buybacks can be a fairly low-risk approach for companies to use extra cash. Re-investing cash into, say, R&D or new a new product can be very risky. If these Investments don't pay off, that hard-earned cash goes down the drain. Using cash to pay for acquisitions can be perilous, too. Mergers hardly ever live up to expectations. Share buybacks, on the other hand, let companies invest in themselves when they are confident their shares are undervalued and offer a good return for shareholders. (For more, see how you can Use Breakup Value To Find Undervalued Companies.)

When Buybacks Fail Some of the time, share buybacks can be a great thing. But oftentimes, they can be a downright bad idea and can hurt shareholders. This can happen when buybacks are done in the following circumstances:

1. When Shares Are Overvalued For starters, buybacks should only be pursued when management is very confident the shares are undervalued. After all, companies are no different than regular investors. If a company is buying up shares for $15 each when they are only worth $10, the company is clearly making a poor investment decision. A company buying overvalued stock is destroying shareholder value and would be better off paying that cash out as a dividend, so that shareholders can invest it more effectively. (Find out what dividends can do for your portfolio in The Power Of Dividend Growth.)

2. To Boost Earnings Per Share Buybacks can boost EPS. When a company goes into the market to buy up its own stock, its decreases the outstanding share count. This means that earnings are distributed among fewer shares, raising earnings per share. As a result, many investors applaud share buybacks because they see increasing EPS as a surefire approach to raising share value.

But don't be fooled. Contrary to popular wisdom (and, in many cases, the wisdom of company boards), increasing EPS doesn't increase fundamental value. Companies have to spend cash to purchase the shares; investors, in turn, adjust their valuations to reflect the reductions in both cash and shares. The result, sooner or later, is a canceling out of any earningsper-share impact. In other words, lower cash earnings divided between fewer shares will produce no net change to earnings per share.

Of course, plenty of excitement gets generated by the announcement of a major buyback as the prospect of even shortlived EPS can gives share prices a pop-up. But unless the buyback is wise, the only gains go to those investors who sell their shares on the news. There is little, if any, benefit for long-term shareholders. (For more insight, see How To Evaluate The Quality Of EPS.)

3. To Benefit Executives Many executives get the bulk of their compensation in the form of stock options. As a result, buybacks can serve a goal: as stock options are exercised, buyback programs absorb the excess stock and offset the dilution of existing share values and any potential reduction in earnings per share.

By mopping up extra stock and keeping EPS up, buybacks are a convenient way for executives to maximize their own wealth. It's a way for them to maintain the value of the shares and share options. Some executives may even be tempted to pursue share buybacks to boost the share price in the short term and then sell their shares. What's more, the big bonuses that CEOs get are often linked to share price gains and increased earnings per share, so they have an incentive to pursue buybacks even when there are better ways to spend the cash or when the shares are overvalued. (Learn more in the Pages From The Bad CEO Playbook.)

4. Buybacks That Use Borrowed Money For executives, the temptation to use debt to finance earnings-boosting share purchases can be hard to resist, too. The company might believe that the cash flow it uses to pay off debt will continue to grow, bringing shareholder funds back into line with borrowings in due course. If they're right, they'll look smart. If they're wrong, investors will get hurt. Managers, moreover, have a tendency to assume that their companies' shares are undervalued - regardless of the price. When done with borrowing, share buybacks can hurt credit ratings, since they drain cash reserves that can serve as a cushion if times get tough.

One of the reasons given for taking on increased debt to fund a share buyback is that it is more efficient because interest on debt is tax deductible, unlike dividends. However, debt has to be repaid at some time. Remember, what gets a company into financial difficulties is not lack of profits, but lack of cash.

5. To Fend Off an Acquirer In some cases, a leveraged buyback can be used as a means to fend off a hostile bidder. The company takes on significant additional debt to repurchase stocks through a buyback program. Such leveraged buybacks can be successful in thwarting

hostile bids by both raising the share value (hopefully) and adding a great deal of unwanted debt to the company's balance sheet.

6. There Is Nowhere Else to Put the Money It's very hard to imagine a scenario where buybacks are a good idea, except if the buybacks are undertaken when the company feels its share price is far too low. But, then again, if the company is correct and its shares are undervalued, they will probably recover anyway. So, companies that buy back shares are, in effect, admitting that they cannot invest their spare cash flow effectively.

Even the most generous buyback program is worth little for shareholders if it is done in the midst of poor financial performance, a difficult business environment or a decline in the company's profitability. By giving EPS a temporary lift, share buybacks can soften the blow, but they can't reverse things when a company is in trouble. (Learn more in Cash-22: Is It Bad To Have Too Much Of A Good Thing?)

Conclusions As investors, we should look more closely at share buybacks. Look in the financial reports for details. See whether stock is being awarded to employees and whether repurchased shares are being bought when the shares are a good price. A company buying back overvalued stock - especially with lots of debt - is destroying shareholder value. Share repurchase plans aren't always bad. But they can be. So, let's be careful out there

Situation 3: A Company Files For Bankruptcy When a company files for bankruptcy, the stock usually falls precipitously. The company's bonds are also faced with a selloff, although the degree to which this occurs depends on the situation. The difference in the degree of negative reaction between stocks and bonds is that stockholders are the lowest priority in the list of stakeholders in a company. Bondholders have a higher priority and, depending on the class of bond investment (secured to junior subordinated), receive a higher percentage of invested funds. Therefore in this situation, bond prices will typically hold up better than stock prices. (Learn more about how a company goes bankrupt in An Overview Of Corporate Bankruptcy.)

Situation 4: A Company Increases Its Dividend When a company increases its dividend, stockholders receive a higher payout. Bonds, on the other hand, face pressure as the company reduces its cash on hand because this could interfere with its ability to pay bondholders. As a result, stocks generally react favorably to this announcement while bonds may react negatively. (For more, see Dividend Facts You May Not Know.)

Situation 5: A Company Increases Its Credit Line When a company increases its credit line, stocks are generally unaffected. At best, stocks may react positively because the company will not try to issue new shares and dilute current shareholders. Bonds, however, may react negatively because it could be a sign that a company is increasing its borrowed funds. However, if there is a cash squeeze in the short term, it may mean the company can meet short-term obligations, which is positive for the bondholders.

Conclusion Any potential investment should be based on a company's fundamentals while considering the potential likelihood of various situations or scenarios that may impact the investor. After finding a company that meets your investing criteria, a decision on whether to invest in the bond or stock needs to be made. Continually reviewing the investment in light of changes based on company decisions is a necessary component of any investment strategy

MERGERS AND AQUISITIONS First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are various ways the acquiring company can pay for the assets it will receive. The acquirer can pay cash outright for all the equity shares of the target company, paying each shareholder a specified amount for each share. Or, it can provide its own shares to the target company's shareholders according to a specified conversion ratio (i.e. for each share of the target company owned by a shareholder, the shareholder will receive X number of shares of the acquiring company). Acquisitions can be made with a mixture of cash and stock, or with all stock compensation, which is called a "stock-for-stock" merger. (To learn more, see What does the term "stock-forstock" mean?) The term "stock-for-stock" is popularly used in two different contexts, and it regularly makes business news headlines in both. "Stock-for-stock" most commonly appears in headlines in reference to the stock-for-stock merger. In this type of merger, the acquiring company trades shareholders of the target company a predetermined number of shares of its own stock for each share of the target company's stock. This type of merger is often said to be more efficient than traditional cash-for-stock mergers because the transaction costs involved are substantially lower and the stock-for-stock arrangement doesn't stretch the acquiring company's cash position quite as much. In a merger funded entirely with cash, the acquiring company may have to go to the debt market to raise the cash to pay for the merger. Because large acquisitions are very expensive, acquiring companies often issue expensive equity and debt that they otherwise would not dream of issuing, such as short-term convertible notes or convertible preferred shares. Making a deal happen with stock can save time and money. Deals that are entirely funded with stock are known as "all-stock" deals. However, it is more common to see a combination tender offer and stock-for-stock deal than an all-stock deal. You may also hear the term "stock-for-stock" used in the context of executive compensation, particularly in reference to employee stock option grants. Typically, executives are the only group of employees who are awarded so many stock options that they can't afford to use them all - this is one case in which an executive may receive a stock-for-stock award or exercise a grant by paying "stock-for-stock" . When an executive is granted either a non-qualified stock option (NSO) or an incentive stock option (ISO), he or she actually needs to get the shares that underlie the option in order to make the option worth anything. Both non-qualified stock options and incentive stock options are usually granted under the condition that the executive cannot sell them or give them away - he or she must exchange the options for stock. These terms are written into executives' contracts to increase their share ownership. Let's say an executive already owns 80,000 shares in the company for which she works, and the company awards her 50,000 ISOs at an exercise price of $5 per option. The executive must come up with $250,000 (50,000 x $5) in order to exercise the ISOs and get the underlying stocks (which we'll assume are currently trading at $12.50). In a stock-for-stock exercise, the grantee can transfer 20,000 shares of her already-owned stock to the company (20,000 x $12.50 = $250,000). Once the executive has met all required holding periods (usually one year), she can get the grant, and it will not have cost her interest payments, as it would have if she had taken out a loan from the bank to pay for the exercise. Read more: http://www.investopedia.com/ask/answers/05/whatisstockforstock.asp#ixzz1WiEK7fHR

When the merger is stock-for-stock, the acquiring company simply proposes to the target firm a payment of a certain number of its equity shares in exchange for all of the target company's shares. Provided the target company accepts the offer (which includes a specified conversion ratio), the acquiring company essentially issues certificates to the target firm's shareholders, entitling them to trade in their current shares for rights to acquire a pro rata number of the acquiring firm's shares. The acquiring firm basically issues new shares (adding to its total number of shares outstanding) to provide shares for all the target firm's shares that are being converted. This action, of course, causes the dilution of the current shareholders' equity, since there are now more total shares outstanding for the same company. However, at the same time, the acquiring company obtains all of the assets and liabilities of the target firm, thus approximately neutralizing the effects of the dilution. Should the

merger prove beneficial and provide sufficient synergy, the current shareholders will gain in the long run from the additional appreciation provided by the assets of the target company.

spinnoffs Several major companies are planning to spin off business segments over the next six months in an effort to increase shareholder value. Investors and management teams are hoping that these restructurings will boost lagging stock prices as well.

So why spin off? And will it really benefit shareholders? Companies that are contemplating a spinoff use various arguments to justify this corporate restructuring. Some firms have disparate businesses that have little in common and splitting them apart allows the management team to operate with greater focus, and hone in on the new spinoff's core business.

IN PICTURES: 5 Reasons Why Companies Care About Their Stock Prices

The second argument is that splitting the company into two or more parts provides greater transparency for investors in valuing the businesses in the public markets. After the split, advocates of spinoffs claim that the sum of the value of the separate parts will exceed the whole. (For more insight, see Parents And Spinoffs: When To Buy And When To Sell.)

Big Spinoffs Tyco International (NYSE:TYC) announced in April 2010 that the company would spin off its electrical and metal products business to shareholders sometime in the first half of fiscal 2011. The company's electrical and metal products segment and designs and manufactures galvanized steel products for sale to various industries; it recorded $1.4 billion in sales in 2009.

This business depends, in part, on residential and commercial construction activity, which is currently at the low point of its business cycle. Profitability here is also driven by the spreads between what the company pays for copper and steel and what it can sell it for.

Another major company planning a spinoff is Motorola (NYSE:MOT). The company has talked about a spinoff of various divisions over the years, only to be derailed by falling markets or other events.

However, the company has finally made the decision to move forward, and in early 2011, Motorola will be splitting into two separate companies. The company's mobile phone and home businesses are being spun out of Motorola into a new company called Motorola Mobility. The present company will change its name to Motorola Solutions, and retain the balance of the company, except for the networks division, which is being sold to Nokia Siemens Networks, a joint venture between Nokia (NYSE:NOK) and Siemens AG (NYSE:SI).

One angle that Motorola used to justify the spinoff was the customer focus of the businesses; Motorola Mobility is focused on the consumer, while Motorola Solutions focuses on the government and enterprises for sales.

Little Spinoffs Smaller companies area setting up spinoffs as well. Sun Healthcare Group (Nasdaq:SUNH) is separating the company's real estate into a publicly traded real estate investment trust (REIT). Sun Healthcare Group owns and operates nearly 100 nursing homes and assisted living centers across the United States.

Sun Healthcare Group believes the value of the real estate holdings that the company owns is not being recognized by the market, and hopes the separation will remedy that oversight. The new company will be called Sabra Health Care and the spinoff will be completed sometime in October 2010.

The Bottom Line Many companies are relying on spinoffs to boost stock price, something the market has refused to do. Keep an eye on these these companies and their new spinoffs for new investing opportunities

Credit rating and stocks volatility This credit cycle has seen its share of defaults and bankruptcies and most observers of the market are sure that there are more to come before we turn the corner. Year to date, after only two months, 31 companies have defaulted on debt totalling $49 billion. Investors can keep track of the activities of the rating agencies to monitor the financial health of companies they own or are interested in. The two major ratings agencies are Moody's (NYSE:MCO) and Standard & Poor's, which is a unit of McGraw Hill (NYSE:MHP)

Growing Downgrades A number of companies in a wide range of industries have seen ratings cut deeper and deeper into the non-investment grade or junk category recently as businesses try to cope with the worst business environment in recent memory. (For further reading, see What Is A Corporate Credit Rating.) Standard & Poor's lowered ratings on Valhi (NYSE:VHI), from B to B-, and placed it on negative credit watch, meaning that the conditions that led to the downgrade is continuing. Valhi's problem is in its titanium dioxide business, which is suffering from weak demand. The chemical compound is used in a range of industrial products including paint, plastics and paper. In its last earnings release in November 2008, the company said volumes fell by 12% from the same quarter last year, offset a little by positive pricing and currency.

TRW Automotive Inc., (NYSE:TRW) saw its rating cut by Standard & Poor's to B+ from BB. The outlook was put at negative. The agency said that with auto sales at 10.3 million units domestically in 2009, the company would see pressure on revenues and may need to renegotiate agreements with lenders.

Another company with exposure to automotive sales is Tenneco (NYSE:TEN) which had its ratings lowered by Moody's to B3 from B1. The company makes emission control and other products. Tenneco reported a GAAP loss of $298 million ($6.40 per share) for its fourth quarter.

One sector where investors rely heavily on the actions of the ratings agency is the financial sector, particularly insurance. Last week, Standard and Poor's downgraded the ratings of Prudential Insurance (NYSE:PRU) from A+ to A. The agency cited "declining earnings and potential for elevated investment losses in the future." The market reaction was quick and the stock fell precipitously once the news became public.

Corporate defaults have started to increase in 2009, and investors should incorporate the actions of the two major ratings agencies into their stock selection. Although they have received criticism for being slow to downgrade the worst of the structured products, they are still important to the investment process.

Cross listing
Cross listing of shares is when a firm lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. Examples include: American Depository Receipt (ADR),European Depositary Receipt (EDR), International Depositary Receipt (IDR) and Global Registered Shares (GRS). Generally such a company's primary listing is on a stock exchange in its country of incorporation, and its secondary listing(s) is on an exchange in another country. Cross-listing is especially common for companies that started out in a small market but grew into a larger market. For example, numerous large Canadian companies are listed on the New York Stock Exchange or NASDAQ as well as the Toronto Stock Exchange. The term can also be used to refer to the listing of a company on more than one stock exchange in the same country: as an example, there are a handful of companies in the United States that are listed on both the New York Stock Exchange and the NASDAQ. Some organizations, such as Liberty Media, have multiple listings reflecting different underlying assets, called tracking stocks.

Motivations for cross-listing

The academic literature has identified a number of different arguments to cross-list abroad in addition to a listing on the domestic exchange. Roosenboom and van Dijk (2009)[1] distinguish between the following motivations:

Market segmentation

The traditional argument for why firms seek a cross-listing is that they expect to benefit from a lower cost of capital that arises because their shares become more accessible to global investors whose access would otherwise be restricted because of international investment barriers.

Market liquidity

Cross-listings on deeper and more liquid equity markets could lead to an increase in the liquidity of the stock and a decrease in the cost of capital.

Information disclosure

Cross-listing on a foreign market can reduce the cost of capital through an improvement of the firms information environment. Firms can use a cross-listing on markets with stringent disclosure requirements to signal their quality to outside investors and to provide improved information to potential customers and suppliers (for example, by adopting US GAAP). Also, cross-listings tend to be associated with increased media attention, greater analyst coverage, better analysts forecast accuracy, and higher quality of accounting information.

Investor protection ("bonding")

Recently, there is a growing academic literature on the so-called bonding argument. According to this view, cross-listing in the US acts as a bonding mechanism used by firms that are incorporated in a jurisdiction with poor investor protection and enforcement systems to commit themselves voluntarily to higher standards of corporate governance. In this way, firms attract investors who would otherwise be reluctant to invest.

Other motivations

Cross-listing may also be driven by product and labor market considerations (for example, to increase visibility with customers by broadening product identification), to facilitate foreign acquisitions, and to improve labor relations in foreign countries by introducing share and option plans for foreign employees.

Costs of cross-listing
There are, however, also disadvantages in deciding to cross-list: increased pressure on executives due to closer public scrutiny; increased reporting and disclosure requirements; additional scrutiny by analysts in advanced market economies, and additional listing fees. Some financial media have argued that the implementation of the Sarbanes-Oxley act in the US has made the NYSE less attractive for cross-listings, but recent academic research finds little evidence to support this, see Doidge, Karolyi, and Stulz (2007).

What do managers say?

A questionnaire asking managers of international companies has shown that firms cross-list in the US mainly because of specific US business reasons (for instance US acquisitions, US business expansion and publicity), liquidity and status of US capital markets, and industry specific reasons (listing of competitors, benefits of financial analysts). Meeting SEC disclosure requirements and preparing US-GAAP reconciliations were cited as the most important disadvantages. Officials of ADR companies without an official listing (Level I and Rule 144A ADRs) perceived the expansion of the US shareholder base as the principal benefit followed by specific US business reasons. On the question of what deters them from an official US listing, they mentioned the time-consuming and expensive US-GAAP reconciliations as well as listing fees as the hardest impediments. Additional disclosure requirements were cited as less difficult to overcome.

Do cross-listings create value?

There is a vast academic literature on the impact of cross-listings on the value of the cross-listed firms. Most studies (for example, Miller, 1999[4]) find that a cross-listing on a US stock market by a non-US firm is associated with a significantly positive stock price reaction in the home market. This finding suggests that the stock market expects the cross-listing to have a positive impact on firm value. Doidge, Karolyi, and Stulz (2004) show that companies with a cross-listing in the U.S. have a higher valuation than non-cross-listed corporations, especially for firms with high growth opportunities domiciled in countries with relatively weak investor protection. The premium they find is larger for companies listed at official US stock exchanges (Level II and III ADR programs) than for over-the-counter listings (Level I ADR program) and private placements (Rule 144A ADRs). Doidge, Karolyi, and Stulz (2004) argue that a cross-listing in the US reduces the extent to which controlling shareholders can engage in expropriation (through "bonding" to the high corporate governance standards in the US) and thereby increases the firms ability to take advantage of growth opportunities. Recent research, see www.crosslisting.com[1], shows that the listing premium for crosslisting has evaporated, due to new US regulations and competition from other exchanges. Some recent academic research finds that smaller foreign firms seeking cross listing venues may be opting for UK exchanges over US exchanges due to the costs imposed by the Sarbanes-Oxley Act. On the other hand, larger firms seeking "bonding" benefits from a US listing continue to seek a US exchange listing.[6] The academic literature largely ignores crosslistings on non-US exchanges. However, there are many cross-listings on exchanges in Europe and Asia. Even US firms are cross-listed in other countries. In the 1980s there was a wave of cross-listings of US firms in Japan. Roosenboom and van Dijk

(2009) analyze 526 cross-listings from 44 different countries on 8 major stock exchanges and document significant stock price reactions of 1.3% on average for cross-listings on US exchanges, 1.1% on London Stock Exchange, 0.6% on exchanges in continental Europe, and 0.5% on Tokyo Stock Exchange. These findings suggest that cross-listings on Anglo-Saxon exchanges create more value than on other exchanges. They also highlight the incomplete understanding of why firms cross-list outside the UK and the US, as many of the arguments discussed above (enhanced liquidity, improved disclosure, and bonding) do not apply.