X Ltd is currently considering acquiring Y Ltd, a smaller IT Services company from European Union. Essay Example

ACQUISITION ANALYSIS

Analysis of Acquisition

Finance:

September 27, 2013

Table of Contents

Content…………………………………………………………………………………Page

  1. Executive Summary……………………………….…………………………………4

  2. Analysis……………………………………………..………………………………..4

  3. Recommendations and Conclusion……………….………………………………….8

  4. Letter of Transmittal…………………………..………………………………………8

  5. References……………………………………………………………………………9

Potential Acquisition of Y Limited

  1. Executive Summary

Expanding into new global markets through acquisition is much the same as venturing into a new enterprise. Most multinational companies often fail to succeed in international markets because of poor or lack of due diligence of the host-nation’s culture, as well as country specific aspects such as national politics, societal attitudes, technological differences and economic barriers. Companies need to be vigilant to factors such as political landscapes, for instance terrorism and civil wars to they make acquisition decisions because such elements can ultimately result in enlarged costs of conducting business operations comprising hiring of security personnel to secure your premise or buying business insurance to protect your business against possible damages.

Intangible assets entail, the level of the management team (whether strong or not, the reputation of the company, the growth trends of the IT industry, whether the company has skilled workforce, the customer loyalty and concentration, the trade secrets of the company, the quality of reporting its financials since Y is a limited company and the geographical location of the company. Therefore, in establishing the real value of Y limited, X limited should peg the value of Y limited on those unique strategic advantages that only Y limited can achieve. Wilson, 2003). Potential investors need also to consider intangible assets while determining the value to the company to be acquired (

  1. Analysis

everal multinational IT corporations and not just Indian firms are increasingly venturing into the global markets because they have noted that success cannot be achieved only within their domestic markets. For Indian IT Company, venturing into international markets does not merely mean that there are opportunities outside Indian geographical segments that they can tap, but it also means the opposite (i.e. other multinational IT companies are also India as a potential investment location). For companies with great vision and mission such as X limited, they aspire to grow and expand both in the domestic and global markets. Hence, international venture is being sought by X limited mainly to acquire economies of scale and to reduce the risk of the reliance on the saturated local and geographical market segments with regard to their global rivals.Gaughan (2001) sAccording to

International concerns causing business failures include hidden costs for instance internal regulation and bureaucracy. The monetary and fiscal policies in Europe can affect the monetary exchanges in France that play a significant role regarding the operational expenses such as paying of wages and purchasing of materials. France has an open tax system and there are no hidden fees which can result in the increased cost of running business. Economic barriers:

The perception of the public is a significant component of a company’s global reputation. Therefore, looking at the country’s societal beliefs and issues are important for the success of X limited. According to (Sherman, 2007 pg, 16) a survey carried out by GlobalScan, 8 out of ten people in France belief that companies should be partly responsible for minimizing human abuses in states where they conduct business. Societal elements comprise a company’s impact on the religious beliefs, the environment and local communities. Also, because Indians mostly speak English and their business counterparts and customers in France speak French, Language barrier may affect the company operations and could cause increased costs for hired translators and cultural misunderstanding. Societal factors:

Future Returns: The value of the business should be determined from the perspective of its future returns and performance (Owen and Daskin, 2008). The 5-year financial and performance history of Y limited is important to the extent it assists in projecting the future returns and performance of the Y limited once acquired by X limited. Strategically, the future returns and performance of Y limited firmly relies on the current status of the company and has outlined, the Y limited has been recording impressive performance and returns of up to 20% per annum, a clear indication that the future returns and performance of the company would be look good unless something tragic happens. Because the value of the business is not entirely based on the price (for example the million Euros that Y limited has proposed), X limited has to look at associated deal Terms and structure.

Various business values can exist due to various operating assumptions, payment terms, and deal structure among others and not because of various valuation modes. Some of the drivers of business value include; future performance, cash flows as opposed to profits, deal structure, financial return expectation, as well as the asset type.

Political Risks: Political events and decisions usually have an unpleasant effect on the operations of a company. Political risks comprise actions of political groups and governments, which restrict company transactions, causing profit loss. In severe instances, political risk might include property confiscation. Political risk can take various dimensions. France, for example after last year’s general election some policies may change, because of the new leadership that may have a different ideology and change earlier policies (Marvin and Sam, 2007). Within the macro-level, the political risks may arise as result of external elements such as fractionalization of ethnic groups, political systems, societal fragmentations along the lines of religion, caste, and language, political instability of the neighboring states and reliance of major political power. Within the micro-level, the potential risks may be caused by changes in policies and laws in areas such as import duties and taxation, currency convertibility, and the control of dividends repatriation among others.

Micro-Analysis

The best way to assess the level of country-specific risks is through understanding the way the country/government views the operations of the company. X limited should pay attention to the following scenarios and their effect when the acquire Y limited in France (Smith, 2001).

  • It can be viewed by the government as a threat to the independence of the country. This is particularly true in scenarios whereby the MNC acquires control of strategic national resources or assets such as IT infrastructure or oil.

  • It can be viewed by the government as a threat to the local companies. Specifically, the host nation (France) could be concerned about the local companies from declining sectors and those within the promising sector, which require hand-holding (Hofstede, 2001).

  • It can be perceived by the government to be the hiding value, through depressing revenues to minimize tax liability or by way of transfer pricing regulations. In some instance, the government may suspect that the company is intentionally keeping the best technology out of the country.

According to Philip (2001) the Potential Advantages of Acquisition comprise;

  • Goodwill and market has been established

  • There is generation of cash flow

  • The relationships with the banks and suppliers have been established

  • There great potential from growth

  • Economies of scale and scope

  • Marketing and managerial expertise

  • Financial strength

  • Advance technology

Potential Disadvantages of acquisition

  • Religious heritage

  • Human resource norms

  • Corruption and nepotism

  • Integration of Cross-border supply chain

  • Supply-chain disruptions

  1. Recommendations and Conclusion

Based on the above, X limited should adopt some defensive and integrative strategies to manage those potential risks.

Integrative Strategies:

limited should establish proper communications channels with the host nation. X

Marvin and Sam, 2007). They should make the expatriates familiar with the culture, customs and language of the host nation (

Ensure extensive deployment of the locals to manage the business operations

Defensive Strategies:

The company should raise as much debt and equity as possible from the host nation

Where possible, the company should insist on host nation guarantees and

Employ few host-nation citizens in key position

After conducting a thorough background information check, past returns and performance of Y limited as well as the projected returns, together with the potential risks, micro analysis, country-specific risks, and intangible values such as the reputation, customer loyalty, location and quality workforce of Y limited, this report concludes that is appropriate for X limited to go ahead with the acquisition plans because France, has desirable fiscal and monetary policies backed with great political stability.

  1. Letter of Transmittal

To: THE MANAGING DIRECTOR, X LIMITED

From: “INSERT NAMES”

Ref: 45, INDIA, BOMBAY

RE: ACQUISITION OF Y LIMITED

A per your request to prepare a report detailing advice regarding the potential acquisition of Y limited, I have assessed the fundamental information concerning the subject matter and the report is as outlined above.

The main aim of this analysis is to provide the potential returns and risks of this impending acquisition. In doing so, the report has narrowed down its findings to country-specific risks and returns as it applies to the IT industry.

It was a wonderful experience working on this project, and hope to continue working with you in your future projects.

Thanking you,

“INSERT NAME”

7. References

Smith, J. 2001. How do foreign patent rights affect Indian. exports, affiliate sales, and

licences? Journal of International Economics Vol.55, pp. 411-439.

Gaughan, A. 2001. Mergers and Acquisitions. New York: Harper Collins.

Owen, S. H. and M. s. Daskin, 2008. Strategic Facility Location: A Review, European Journal

of Operations Research,111, pp 423-447

Sherman, J. 2007. Running and Growing Your Business. New York: Random House.

Wilson, D., 2003. Strategy as decision-making. In Images of Strategy. Oxford: Blackwell.

Hofstede, G. 2001. Culture’s consequences: International differences in work-related values.

Newbury Park CA: Sage.

Philip, M. 2001. Dealing with an eruption of corruption, Financial Times Mastering Risk,

Volume I pp. 187-190.

Marvin, Z., and Sam, W, 2007. Driving defensively through a minefield of political risk,

Financial Times Mastering Risk, Volume I, pp. 176-180.