IFM as a Multinational Company - Example

Name: Course: Institution: Lecturer: Date: Table of Contents Table of Contents 1 Executive summary 2 2.0 Overview of strategic issues 2 2.1 Joint venture proposal 4 2.1.1 Financial evaluation 4 2.1.2 Non-financial evaluation 6 3.0 Re-domiciling in Monaco. 8 4.0 Sources of finances 11 4.1 Internal sources 11 4.2 External sources 11 5.0 Conclusion 12 6.0 Recommendations 12 7.0 References 13 8.0 Appendices 15 Intеrnаtiоnаl Businеss Finаnсе Executive summary IFM is a multinational company with subsidiaries in many countries of the world; the company is in the financial industry and is considering expanding their company through reconstruction of the company so as to facilitate growth and subsequent increase in profitability of the company. The company has its parent company in France but is considering reconstruction of the company through re-domiciling so that it will transfer its parent company in Monaco a tax haven country so as to maximize on their profitability by lowering the tax liability. This is aimed at facilitating growth in the company. The company also has an operation of allowing a new entrant into the business as a joint venture so as to take advantage of the benefits accruing to the business due to the joint venture and thus enhance growth in the company. The restructuring of the company is aimed at reducing the losses the company has been making in Germany and also to ensure that maximum profits are reported. This report is focused at reporting to the strategic management the appropriate way that the company should consider in enhancing growth and expansions in the company by improving the value of the company and the cost used in operating the company. Thus, various factors relating to a joint venture and re-domiciling of the company are considered so as to adequately advice the management. 2.0 Overview of strategic issues IFM is a multinational company that offers financial services to its customers who are majorly companies in the industrial and commercial property construction and development industry. It is has subsidiaries in many countries with the profitability of each subsidiary being considered separately before they can be consolidated. Its major aim is to be the leading financial services provider both locally and internationally to its customers so as to expand their market and enhance an increase in their profitability. The strategic management team must be having in place the goals that are clearly defined and formulated and implemented as well as have in place strategies to facilitate monitoring of the goals so as to ensure good performance of the company (Freeman 2010). It is the company’s objective to expand their and grow in terms of their operations by investing in other nations such as china and India, this is aimed to take them around five years before the expansion is complete. To sustain their operations and preventing registering losses the company is also considering divesting in the Germany subsidiary which has been constantly making losses from their investment operations carried out in the subsidiary. With this the company will be able to carry out other activities that will promote profitability for the company within the region. It is the focus of the company to enter into a viable joint venture so as to improve the performance of the company and promote an increase in their profitability. According to Hitt et al (2012), the strategic performance of the company is affected by the socio-cultural, political, economic, legal and demographic factors of the country each subsidiary is operating since they affect the policies guiding operations in the company and dictate the internal and external environment factors affecting business operations. The exchange rates, interest rates, inflation rates, tax policies, demographic characteristics as well as technological development rate in the countries where the company operates are important in facilitating the PESTLE analysis of the company (Phillips & Storey 2010). stable capital structure, low cost of operations constant losses in Germany in the last 5years, room for market expansions, changing tax regulation and economic factors are among the factors that facilitates SWOT analysis for the company and thus form part of the strategic issues that the management focuses on in the evaluation of the company’s performance. Thus, it is the mission of the company to ensure sustainability of their operations through customer satisfaction and consistent growth in the organization. After evaluation of the company’s cash flow it is clear that investing in the joint venture will facilitate growth in the business since it is a good way of expanding their operations and venturing into new markets and thus promoting increase in profitability. The Company also has both skilled and unskilled employees and has embraced technological advancement in their operations which makes it easy for the company to promote growth of their business. The strategic review of the issues surrounding the company is essential in providing guidance to the strategic managements on the points of concentration so as to promote better and sustainable performance of the business. The company has a higher weight of equity than debt which indicates that the company is able to support its operations using less debt and thus has a better value and opportunity to increase profitability since a less percentage of their capital is financed through debt (Bennouna et al 2010). 2.1 Joint venture proposal 2.1.1 Financial evaluation The company is considering introducing a new entrant into through a joint venture; its viability has been evaluated using the net present value method of evaluating performance. Thus the cash flow, the operating cost and the amount used as initial investment have been included in determining the net present value expected from the joint venture, since the NPV value is positive (€ 1,641) then, introducing the new entrant through a joint venture is viable for the company since it is expected to register growth and enhance their profitability since a positive value of NPV is an indicator that the value of the company has been increased over the years the cash flow is being determined. This will facilitate expansion of the business as well as diversification of the market as part of business restructuring within the business. NPV has been used in determining the viability of the joint venture due to its advantages over other methods. In using NPV factors such as risks involved in carrying out the investment through use of the cost of capital as one of the determinants used in calculating NPV, the opportunity cost incurred among other important aspects are put into consideration so that the management is able to make a well informed decision since the discount rate is not fixed but can be adjusted to put into consideration these factors. The method also puts into consideration the time value of money and thus NPV value is calculated using the discounting rate over the period the investment is expected to last. NPV has also been considered the appropriate method of determining if allowing the new entrant as a joint venture is worthwhile because it facilitates in projecting if the investment will add or lead to a decline in the value of the company (Beamish 2013). In using the NPV to calculate the viability of an investment using the NPV method profitability and risk involved in making the investment is greatly considered which makes evaluation of investment using the NPV method more appropriate unlike with other methods of evaluating investment such IRR and the payback period. NPV has also been used in predicting the viability of the joint venture because unlike other methods it puts into consideration all the projects involved in company since the method calculates performance in the total expected life time of the investment and the discounting rate is adjusted over the years the investment is expected to last. The company having applied the NPV method in determining the viability of the joint venture and found it to be a positive figure, the venture is viable. The NPV value is calculated based on various assumptions, tax is assumed to be paid in Germany only based on double taxation agreement so that tax used in determining profit after tax is based on the taxation rate in Germany and is paid in arrears in the following year. The cash flows are also assumed to arise at the end of each year so that discounting is done at the end of every year and the net present value calculated as a summation of the present values calculated at the end of each year. The exchange rate used in converting the currency is also assumed to increase over the years after their conversion using the spot rate. As stated by (Bennouna et al 2010), the inflation rate in the country is also considered in determining the cash flow since the rate of inflation is considered to have a significant effect on the cash flow used in determining the NPV. The cost of capital has also been used in determining the NPV so as to consider the risk involved in allowing the new entrant as a joint venture. Operating costs and depreciation which are very essential in determining the cash flow used in calculating the NPV are assumed to accrue evenly over the years considered as the life span of the investment. The interest rates in both the UK and eurozone are assumed to have effects on the exchange rates used in converting the currency used in the transactions. The home currency has been used in calculating NPV so as to put into consideration the effects of exchange rates and inflation in the country on cash flows. 2.1.2 Non-financial evaluation Undertaking a joint venture will promote expansion and increased performance in the company as it is expected there will be 15% increase cash flow that is expected over the years in the company. This is because it increases the capital committed in facilitating operations in the company. The joint venture will be worth 4 million with each of the two parties to the venture contributing 2 million to as capital to the business. This amount will be used to support operations within the company thus promote a faster growth rate in the business and thus will improve the profitability of the business. Since proceeding with the joint venture will mean expansion of the business, then the company will benefit from a wider market and will increase the range of customers it serves and thus will achieved improvement in their performance. Killing (2012), supports that, allowing a new entrant into the business as a joint venture will also facilitate sharing of resources required in reaching out to the customers, the company will share technology among other resources which will result in reduced cost of operation within the business thus increasing the profitability. Since the parties to the joint venture are the ones contributing capital towards engaging in the venture the business will not incur additional interest expenses on debt since it will not borrow more capital to facilitate the expansion. The joint venture is limited in its life time which is 4 years after which they can decide to buy out the venture or continue with the business as a joint venture, this provides the business with a time frame after which they expect to achieve their set objectives. According to Gnyawali & Park (2011), joint venture involves establishing relationships among two businesses that have been in existence and operating separately this is a process and increases the risks for the business if the right relationship is not established. A joint venture since it risks the objectives and aims of the two businesses which are often different and have to be integrated so that the new venture has a direction. Engaging in joint venture will result in the diversification of culture and affect cooperation within the business and may result in conflicts and be a hindrance to growth of the business. The fact that the two businesses have different specializations though in the same industry is a risk to the business especially if the right approach is not given to ensure that the objectives of the two companies are incorporated in coming up with the objectives of the joint venture. From the calculated NPV the joint venture is reliable since it yields a positive NPV which indicates growth in the value of the company over the years and thus will promote increase in profitability level of the business. It is also trust worth since capital contribution is on 50-50 percent basis so that each partner is expected to participate equally with the other in the business. Their also sufficient information that is available for evaluating the viability of the joint venture which makes the venture trustworthy for the company to engage in. The cost of capital incurred in engaging in the joint venture has also been determined which makes it possible for the company to consider the level of risk that the company is being exposed to in engaging in the business so that it is viable and trustworthy as the management is making a decision to engage in the venture from an informed perspective (Cuypers & Martin 2010) 3.0 Re-domiciling in Monaco. As a way of restructuring their business so as to achieve growth and expansion the company is also considering changing their parent company from France to Monaco. This will enable the company to maximize on the high sales that are made in Monaco compared to France and thus improve their profitability (Mitchell 2012). This option comes with increase in the finances required in the company due to increased operating cost in the zone and the cost incurred in the restructuring process. Monaco is a tax haven which means by transferring the parent company there the company will benefit from low interest rates which will result in reduction on their tax income and thus lower their tax liability in the country. This will open up an avenue for increased income and thus promote growth of the organization. Monaco being a tax haven will also promote transfer pricing among the subsidiaries of the company so that products and services can be sold at a lower price in other subsidiaries which increases the profitability and results to growth in sales for the company (Luo et al 2010). According to Todero (2010), in tax haven country there is high secrecy of operations especially for companies offering financial services. Thus by transferring the parent company to Monaco the company will benefit from increased foreign investments since investors tend to take advantage of the fact that their transactions will be treated secretly. However, it is important that the company is careful so that important information in the transactions is not hidden resulting in poor performance of the company. transferring the parent company to Monaco will mean that the company will pay less or no tax on the income derived from their operations which is a benefit to the company, though the company will require effectiveness in information management with other countries where they have subsidiaries because tax haven countries do not effectively facilitate exchange of information with other countries. Transferring the parent company to a tax haven country gives the country an opportunity to maximize on their profits thus creating an avenue for growth and expansion (Stewart 2013). Political risks relating to the firm, the country and occurring globally will have an effect of the transfer on the parent company to Monaco because they will directly or indirectly affect the operations carried out. This is because political risks surrounding the firm contribute to the internal environment of the business and thus are part of the business risks facing the business. The country has also factors such as corruption, political stability, and low violence, strong rule of law, an effective government and proper regulatory framework that will promote effective performance of the business. Transfer of prices is also not restricted by the governments so that it is allowed in the country. Increased terrorism across the globe is among the political risks that the company is likely to encounter in Monaco. The business will also require a license to authorize their operations in Monaco so that they do not end up conflicting with the country’s regulatory framework. It is advisable for company to take insurance cover against the political risks that may affect the business extremely (Iliescu & Ciobǎnaşu 2010). Tax repatriation in Monaco will be based on the exchange trading at the moment in the country. Thus, upon re-domiciling of the company profits will be reported in terms of Euros which is the currency used in Monaco. This will promote higher profitability to the company especially due to the fact that profitability is favored by lower or no tax liability on the company in the country. Repatriation of profits in Monaco will enhance tax planning so that the tax liability of the company will reduce. Re- domiciling of the company will facilitate the company to benefit from diversified management and global approach to their financial services. The company after re-domiciling can consider getting finances to cater for the additional costs through borrowings, entering into contracts with parties or acquiring grants from the public or private sector. The increased profits can also be reinvested to facilitate expansion of the business. According to (Luciano & Di Monaco 2011), the country has population less than that of France but will skilled to provide adequate workforce for the company. The employment rate of Monaco is above 95% due to the high rate of innovation, initiative and availability of technical skills among the population. Due to developments in the financial services sector there are readily available and well trained experts in the sector. French is the widely spoken language in the country with Italian and English being also used. Most of the individuals in the country are faithful of the Roman Catholic religion. Formal dress codes and greetings are accepted in the country. There is multi ethnicity in the country so that the culture of the country is also diverse as depicted by different arts and practices within the country (Mariani et al 2012). 4.0 Sources of finances 4.1 Internal sources The restructuring of the business will involve additional operating cost that will necessitate additional funding in the company. The company can consider financing their operations through retained earning which is a cheaper source of financing since it does no attract interest. The company can also decide to sell off some of its assets that will not be required in France upon transfer of the parent company. This is also a better way of funding the company since it does not increase the liability of the company. The company may decide to avoid borrowing from financial institutions but instead get finances through venture capital. Internal source are readily available and do not increase the liability of the company (Chavis et al 2011). 4.2 External sources The company can also consider funding their reconstruction project through external sources of finances. The company can consider borrowing from individual, multinational companies, the government of or from financial institutions. They can also to get a loan stock in form of a debenture and thus increase the capital base for the company. The company should consider the risks and cost involved in considering each sources so that they able to chose a source with less risk and lower interest rates so as to lower the liability of the company. The company should also consider the amount required and the security involved in any of the external sources chosen (Owolabi & Pal 2011). 5.0 Conclusion The company can consider expansion and improving their growth through re-domiciling or by allowing the venture capital. From the NPV calculated it is viable to consider a joint venture since with equal contribution of capital by the two companies the additional costs arising from the venture will be catered for and thus the company will not need to seek other sources of finances to cater for their operations. Their also increased benefits such as sharing of resources, technology and expansion of the company that comes with adopting the joint venture. Reconstruction through re-domiciling will result in increased cost of operation so that the company will eventually lower the rate of their growth. 6.0 Recommendations The company should allow the new entrant as a joint venture so as to promote growth and expansion and eventfully achieve increase in profitability in the company. For a venture capital to be more beneficial to a company it is important that the company enhances the communication channels so that cooperation is enhanced in the company. The two companies forming the joint venture have different goals and objectives, it is important that the management integrates them so that there is unitary focus in carrying out the operations of the joint venture. As indicated in the NPV calculated the company’s strategic management should consider the risks that the company will be exposed to due to the joint venture so as to hedge the company against them. Since the major macroeconomic factor affecting growth in the company is competition the company should also engage in improving their competitive advantage over their competitors. 7.0 References Beamish, P, 2013, multinational joint ventures in developing countries, (RLE International Business), Routledge. Bennouna, K, Meredith, G, G, & Marchant, T, 2010, Improved capital budgeting decision making: evidence from Canada, Management decision, Vol.48,Iss.(2), Pp225-247. Chavis, L, W, Klapper, L, F,, & Love, I, 2011, the impact of the business environment on young firm financing. The World Bank Economic Review, Vol.25, Iss.(3), Pp486-507. Cuypers, I, R., & Martin, X. 2010, what makes and what does not make a real option & quest; a study of equity shares in international joint ventures, Journal of International Business Studies, Vol.41,Iss.(1), Pp47-69. Freeman, R, E 2010, Strategic management: A stakeholder approach, Cambridge University Press. Gnyawali, D, R., & Park, B, J, R, 2011, co-competition between giants: Collaboration with competitors for technological innovation, research Policy, Vol.40, Iss.(5),Pp 650-663. Hitt, M, Ireland, R, D, & Hoskisson, R, 2012, Strategic management cases: competitiveness and globalization, Cengage Learning. Iliescu, E, M, & CIOBǍNAŞU, M, 2010, Country Risk–barrier or key factor of globalization, Timisoara Journal of Economics, Vol.3, Iss.(3 (11)), Pp175-182. Killing, P, 2012, Strategies for Joint Venture Success (RLE International Business), (Vol. 22), Routledge. Luciano, A, & Di Monaco, R, 2011, skilled labour market and economic development in the Mediterranean area (No. 42). Luo, Y, Xue, Q, & Han, B, 2010, how emerging market governments promote outward FDI: Experience from China, Journal of World Business, Vol.45, Iss.(1), Pp68-79. Mariani, J, Paroubek, P, Francopoulo, G, Max, A, Yvon, F, & Zweigenbaum, P, 2012, the French Language in the European Information Society, in the French Language in the Digital Age (pp. 53-59), Springer Berlin Heidelberg. Mitchell, D, J, 2012, why Tax Havens Are a Blessing. Owolabi, O, & Pal, S, 2011, the value of business networks in emerging economies: an analysis of firms' external financing opportunities (No. 5738), discussion paper series//Forschungsinstitut zur Zukunft der Arbeit. Phillips, L, & Storey, J, 2010, business strategy, Public Finance. Stewart, J, 2013, Is Ireland a Tax Haven (No. 430), IIIS Discussion Paper. Todero, A, D, 2010, stop tax Haven Abuse Act: a unilateral solution to multilateral problem, The. Minn. J. Int'l L., Vol 19,Pp 241. 8.0 Appendices Workings               Data             Cost of equity 12%           Cost of debt 7%           Tax rate (Germany) 29%           Spot rate(£/€) 0.841           Duration (years) 4           Interest rate(uk) 2%           Interest rate (eurozone) 1%                                         €' 000 Weight         Equity 13,000 65%         Debt 7,000 35%         Total 20,000 100%                                     Expected Exchange Rate = Spot Rate x ((1+interest uk)/(1+interest rate in Eurozone))^time                                       Year     Expected Exchange Rate       0 0.841 0.841       1 0841*[(1+2%)/(1+1%)]^1 0.849       2 0841*[(1+2%)/(1+1%)]^2 0.858       3 0841*[(1+2%)/(1+1%)]^3 0.866       4 0841*[(1+2%)/(1+1%)]^4 0.875                           Years         1 2 3 4     Uk Cashflows £'000 450 518 595 684     Exchange Rate 0.849 0.858 0.866 0.875     Converted Cashflows €'000 530 603 687 782                   Euro Cashflows €'000 900 1035 1190.25 1368.79     Total Cashflows €'000 1,430 1,638 1,877 2,151                                                                                                                                   Cost of capital = We x Ke + Wd x Kd                         = 65%*12%+35%*7%(1-29%)                         = 9.54%           = 10%                               Year         1 2 3 4     Operating costs €'000 235 235 235 235     Depreciation €'000 26 26 26 26     Cash Operating costs €'000 209 209 209 209     Inflation €'000 0 5.23 10.59 16.09     Inflated Figure's €'000 209 214 220 225     Calculation of NPV   Years   0 1 2 3 4 5 Gross Cash flows €' 000   1,430 1,638 1,877 2,151   Operating costs €'000   -209 -214 -220 -225   Taxable Profits €'000   1,221 1,424 1,657 1,926   Tax @ 29%     -354 -413 -481 -558 After Tax Profits €'000   1,221 1,070 1,245 1,445 -558 Initial Investment €'000 -1,200 -800 - - - - Net Cash flows €'000 -1,200 421 1,070 1,245 1,445 -558 Discount factor @ 10% 1.0000 0.9090 0.8260 0.7510 0.6830 0.6210 Present Values €'000 -1,200 382 884 935 987 -347               Net Present Value €'000 1,641           Read More