Vibrant Limited Is Considering Acquiring Galaxy Pharma, a Japanese Pharmaceutical Firm - Case Study Example

Intеrnаtiоnаl Finаnсiаl Mаnаgеmеnt Name Course Lecturer Date Executive Summary Acquisitions in the corporate world are becoming increasingly significant; they are also receiving attention especially in the intense of globalisation. The magnitude and growth of deal values and mega acquisitions are evident. Expert advisory are consequently in high demand due to the increase in cross border acquisitions. They facilitate the undertakings and also maximise the value of acquisition transactions. Advisory companies and persons providing advice on acquisition matters are playing significant role, they almost determine the outcomes of the acquisition deals. There are significant potential risks and returns that surround any acquisition transaction and more so the cross border acquisitions. This report provides a discussion and recommendations of potential risks and returns in a deal where Vibrant Limited, a Canadian multinational pharmaceutical firm, is considering acquiring Galaxy Pharma, a Japanese pharmaceutical firm. Letter of Transmittal The acquisition of Galaxy Pharma provides a very good opportunity for Vibrant Limited to implement its strategy to compete in the Asian market. Vibrant Limited will bring its vision to fruition by acquiring Galaxy Pharma; it will inject capital and expand the company considerably. It will help Galaxy Pharma to realise its vision to become a reality. Nocke & Yeaple (2007) report that there are a lot of complexities involved in acquisitions across national borders; the complexities are far more than for acquisition of domestic firm. As such, it is very important to collect enough data, follow the due diligence process and take more time to evaluate the company being acquired. Galaxy Pharma is a foreign company and therefore the process of acquisition will take more time, capital out lay as well as more efforts. Therefore, it is very important for Vibrant Limited to embrace itself in this whole processes. Acquisition of Galaxy Pharma by Vibrant Limited The process of acquisition may also be determined by the level of experience of Vibrant Limited as well as its presence in the Japanese market (where the acquisition is being made). This is because there may be political, cultural and legal implications involved in addition to economic and financial implications. Importantly, both companies are in the same industry and they are both pharmaceutical companies. They also have the similar functions such as finance and accounting. These factors make acquisition determination simpler. Although the impacts of best practices and standards differ between Canada and japan, Vibrant Limited is a multinational firm with wealth of experience in acquisitions and international markets and therefore they will not impact negatively to the acquisition process. The impacts only add to the efforts and time required for due diligence (Nocke & Yeaple 2007). The executives of Vibrant Limited face a great challenge is evaluating “fit” with Galaxy Pharma. This is because they may overestimate synergies that might result from acquisition transactions and underestimate the difficulties of assimilating Galaxy Pharma in to the organisation and harvesting the benefits of those synergies. The excitement of acquiring Galaxy Pharma can cause Vibrant Limited executives to observe the acquisition deal through “rose coloured glasses” and hence fall victims to a hopeful strategy instead of a realistic one.as such, Vibrant Limited should know what it is looking for as well as how it wants to use it, these are essential knowledge elements in targeting the acquisition strategy. Due diligence begins and the company starts to gather information to confirm “fit” for the target company (Cloodt, Hagedoorn & Van Kranenburg 2006). One of the factors, gathered in the due diligence process, that is very important in considering the acquisition is nuance regarding the monetization strategy. Vibrant Limited must determine if the acquisition will result in incremental profits or incremental sales. In this case, the acquisition will result in incremental profit. Sales will also increase but slightly. This is because the acquisition is from a direct to consumer. Vibrant Limited will acquire the whole of Galaxy Pharma meaning that is will take full control of all the company assets, liabilities, investments, customers and market share. Vibrant Limited will therefore implement its strategy to increase profits; the sales will only increase slightly as it would not be in apposition to increase its market presence and market share in the short term (Stahl & Voigt 2008). Conversely, Vibrant Limited must also determine the unintended consequences of the acquisition monetization strategy. One factor that serves advantage to Vibrant Limited is that it possesses the vision, resources and mission to bring Galaxy Pharma vision to reality and also leave the legacy it envisioned. This is very important for Galaxy Pharma. It is not just acquisition of a similar company but an acquisition for improving and realising its vision and objectives (Larkin & DiTommaso 2014). Another factor that Vibrant Limited should consider in acquisition of Galaxy Pharma is the cash flow forecasts. This is a very useful strategy for identifying information requirements for the management. This is because CSF can be affected and be controlled by the actions of the management as well as involvement before achieving desirable outcomes of the process. Thus, CFSs are a useful framework for confirming successful outcome. If Vibrant Limited adequately identifies and control the CFSs, the chance of success of the acquisition will be greatly increased. The company will also use them to improve its performance as well as its potential for success (Cartwright & Schoenberg 2006). Galaxy Pharma will be dependent on the cash flows and not the profits. Is has a low fixed asset base of Yen 8,337 million and therefore need a lower working capital. As such, it will not require much of the profits made to be re-invested back in the business. This will increase amount available for financing debt. For these reasons, the value of the company increases slightly. The value increases because it will have lower re-investment need. Notably, a company with high assets increase valuation as it provides more financial leverage, however, at the same time; it lowers its valuation because its high asset base normally needs higher re-investment of its profits (Gass 2013). In addition, it is very important to consider the future performance of Galaxy Pharma Company. It is important to not only consider the past performance of the company but also focus in the current and future prospects of the business. Importantly, the current performance and the condition of the company determine its future performance. As such, its value would change according to the expectations of Vibrant Limited as the acquirer. The cash flows are the most significant factor in determining the value of the company. The financial leverage of Galaxy Pharma is also very important to consider. This is because higher leverage would mean lower leverage cost. If Vibrant Limited is a lower financial leverage, it would have fewer chances to borrow financial resources. Notably, Vibrant Limited has high financial leverage as it has high asset base and hence lower average cost of capital. The value of Galaxy Pharma will be dependent on the post-acquisition financial leverage. Galaxy Pharma has low financial leverage as indicated by the low asset base, low borrowing capacity and tight lending market. As such, it will command a lower price because of lack of lower cost borrowing. Hence, it commands a respectable price. The value of its assets is relatively low and its size is not as big, as such, Vibrant Limited has paid the right price (Kohnert 2008). Vibrant Limited has higher credit worthiness, has high quality of earnings and also have skilled management. These will help in acquisition as well as after acquisition to turn the company in to a market leader. There are greater potential for underappreciated and unseen risks that could hinder a sound acquisition of Galaxy Pharma. By acquiring it, Vibrant Limited will absorb it liabilities. In case Galaxy Pharma had acquired several other firms over the years, it would be very difficult for Vibrant Limited to track down as well as mitigate all the successor liabilities; it would be a daunting task and a potential risk. Vibrant Limited would be exposed to endless legal claims. Assertively, Galaxy Pharma is a pharmaceutical manufacturer; the company may have accumulated a lot of environmental liabilities over the years (Cornips & Hulk 2008). This will expose Vibrant Limited to such liabilities. Moreover, Galaxy Pharma may have acquired firms that no longer exist but their liabilities are still alive. Vibrant Limited will be responsible for all these liabilities. Essentially, these are some of the risks that face Vibrant Limited in acquiring the Japanese company. If it does not identify these liabilities, evaluate them and mitigate them they will create latent issues. They may also create surprises that were not accounted for in the acquisition transactions. Recommendations The acquisition of Galaxy Pharma by Vibrant Limited is a very good and wise way of investing cash to work. Vibrant Limited Company should acquire Galaxy Pharma as it represents a relatively viable investment opportunity. Although it is not making as much profits, it can transform and improve its performance and hence increased its profitability (Müller-Stewens, Kunisch & Binder 2010). Another recommendation is that Vibrant Limited should pay special attention on Galaxy Pharma liabilities in the due diligence process. It should ask tough questions of Galaxy Pharma management team. Testing its existing assumptions would yield valuable insights in to its competitiveness, legal as well as liability risks (Gass 2013). The company should explore and assess any hidden exposures; this is because they are problematic as Galaxy Pharma insurance policies may stop providing coverage upon the closing of the acquisition transaction (Auerbach 2008). As such, it is important for Vibrant Limited to address these issues before determining the acquisition. It is important for Vibrant Limited to evaluate the various jurisdictions of regulators in Japan. These may heighten its awareness of the financial and legal risks accompanying the acquisition transactions. It should examine keenly the economic uncertainty; it should be vigilant in pursuing concerns about anti-competitive implications of the acquisition deal (Kohnert 2008). Vibrant Limited should examine the future root cause of risks of Galaxy Pharma; it should assess the likelihood of the root cause occurring as well as the consequences of the future occurrence (Cornips & Hulk 2008). This would help it to put in to place the relevant and appropriate measures in preventing and eliminating such causes. Lastly, Galaxy Pharma represents a good opportunity for Vibrant Limited to venture in to the Japanese and Asian markets. Vibrant Limited should acquire Galaxy Pharma. References Auerbach, A. J. (Ed.) 2008, Mergers and acquisitions: University of Chicago Pres Cartwright, S., & Schoenberg, R, 2006, Thirty years of mergers and acquisitions research: Recent advances and future opportunities; British Journal of Management, 17(S1), S1-S5. Cloodt, M., Hagedoorn, J, & Van Kranenburg, H, 2006, Mergers and acquisitions: Their effect on the innovative performance of companies in high-tech industries; Research policy, 35(5), 642-654. Cornips, L, & Hulk, A, 2008, Factors of success and failure in the acquisition of grammatical gender in Dutch: Second Language Research, 24(3), 267-295 Gass, S, M, 2013, Second language acquisition: An introductory course, Routledge Kohnert, K, 2008, Second language acquisition: Success factors in sequential bilingualism: The ASHA Leader, 13(2), 10-13. Larkin, R. F., & DiTommaso, M, 2014, Mergers and Acquisitions, Not-for-Profit GAAP 2014: Interpretation and Application of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES for Not-for-Profit Organizations, 397-412. Müller-Stewens, G., Kunisch, S., & Binder, A, (Eds), 2010, Mergers & Acquisitions: Schäffer-Poeschel Verlag. Nocke, V., & Yeaple, S, 2007, Cross-border mergers and acquisitions< i> vs. Greenfield foreign direct investment: The role of firm heterogeneity. Journal of International Economics, 72(2), 336-365. Stahl, G, K, & Voigt, A, 2008, Do cultural differences matter in mergers and acquisitions: A tentative model and examination, Organization Science, 19(1), 160-176. Read More