Faculty of Business Government and Law - Assignment Example

FACULTY OF BUSINESS, GOVERNMENT & LAW Assignment Coversheet You must keep a photocopy or electronic copy of your assignment. Student declaration I certify that the attached assignment is my own work. Material drawn from other sources has been acknowledged according to unit-specific requirements for referencing. Signature/s of student/s: ____________________________________Date: ______________ *Word Count 1650 APPRAISAL REPORT OF THE ACQUISITION OF GALAXY PHARMA BY VIBRANT LTD Executive Summary In today’s’ highly competitive business world, the desire for growth and expansion have forced companies to enter into international acquisitions. An international acquisition is one of the best methods for an organization that intends to enter new markets. The main reasons for international acquisition include the following: to increase economies of scale, to eliminate competition, to utilize excess resources and to jam start financially efficient question marks or problems. Vibrant Ltd Company aims at acquiring Galaxy Pharma Ltd, which is a Japan-based pharmaceutical company. In its acquisition process, Vibrant Ltd may encounter various risks. This report explores the various risks of engaging in international acquisition. Funding is one of the biggest challenges that parent companies go through during international acquisitions. Therefore, this report will determine the various sources of finance for international acquisition. In addition, the report will examine the value of a takeover using various methods. Letter of Transmittal To: Senior Management Team (SMT) From: Financial Consultant and Investment Advisor Date: 18th September 2014 Subject: Acquisition of Galaxy Pharma by Vibrant Ltd Japan, is an Asian economy that has recorded a remarkable growth in the last two decades. In addition, there are no government regulations (which impacts the investors profitability), and therefore, the company stands to benefit. However, for Vibrant to succeed in the new market, access to skilled and growing labour market and the cost of taxation is required. A thorough study on the taxation mechanisms and laws governing pharmaceutical industry need to be carried out. It is important for the senior leadership team to consider the opportunity cost of this investment (Campbell, 2004). Thank you in advance Warm regards (Student’s name). The Report Introduction Multinationals are exposed to more risks than domestic firms, including agency costs, environmental constraints, regulatory constraints, political risks, cultural risk and ethical constraints. This report will explore the methods that Vibrant can use to measure the value of the acquisition and future business outlook. According to Srivastava (2008), multinational corporations need to have a clear understanding of changes in the financial environment in order to cope with the problems and risks that arise from their operations while, at the same time, capitalizing on the emerging markets. Multinational financial systems allow multinational MNCs to shift funds internally. Evaluating the Value of the Takeover When considering the acquisition, it is important to look at the methods that can be used to measure value for Vibrant. Investment appraisal is a method of determining if an investment is worth taking up. The following are the appraisal methods that are available for MNCs, including Vibrant Ltd (Götze, et al., 2008). Payback Method This method is used to determine the time that it will take to repay the initial capital cost (Brigham & Daves, 2007). Information about the returns of the investment is required to calculate the payback period. This method does not keep in consideration the time value of money (Kinney & Raiborn, 2011). In addition, payback method does not consider cash flow that may be generated after the period considered for payback. Where Period can be in months, days or weeks, the period chosen must be equal to the periods of cash flow calculation. Thus, if you calculate cash flow in months, you should also calculate the period in months. Account Rate of Return (ARR) This method compares the cost of an investment with the profit generated by the investment (Hansen & Mowen, 2007). This method simply is a ratio of Annual return or profit to initial cost of investment. Its simplicity offers several limitations as it requires a benchmark rate for comparison. There is no measure or initial method to determine what is the right investment return. It ignores the time value of money just like Payback method. Net Present Value (NPV) NPV calculates the net value of the investment while taking into consideration the changing value of cash flow. This method tries to calculate the amount needed to be invested to attain certain annual revenue in a specified period of time. The value of money will be affected by interest rates payable on a certain investment. This method is good in comparing alternative investments. NPV assumes a constant capital gearing. This rarely happens as constant refinancing the project will be needed (Delaney, et al., 2008). Where i = interest rate n= number of years NPV uses a process called discounting Cash flow. Using the discounted cash flow method financial accountants can determine which investment over a long period is more profitable. This method is appropriate in evaluating different investments with the same cost. Internal Rate of Return (IRR) IRR discounts future cash flow of a given investment to the point where the Net Value Present is equal to zero. This method gives a margin of safety in case of decline of rate of return. Brigham & Daves, (2009) argue that IRR’s biggest drawback is that it can give two different IRR rates for the same period cash flow if the inflows and outflows reverse during the investment. The method also assumes that the inflows will be reinvested during the period of investment. IRR allows financial accountants to compare performance of two investments with different initial capital demands. Profitability Indexing It allows comparision of cost and benefits of different projects. It is a ratio of Net Present value to Initial capital cost. Financial Risks of the Acquisition Foreign Exchange Exposure Acquisition of Galaxy Pharma will be done in Japanese Yen which will expose Vibrant to currency fluctuation risks. Currency fluctuations are key sources of financial risk to multinationals (Shapiro, 2014). Exposure is the degree to which a company can be affected by changes in foreign exchange rates (Shapiro, 2014). Foreign exchange risks are of three major types including; operational, transactional or translational. Translational exposure occurs during reporting and consolidation of financial records from operating currency or local currency to foreign currency (Shapiro, 2014). On the other hand, transactional exposure arises from business activities in foreign currency. As foreign exchange rates change so are the transactional values of the activities or contractual obligations the business is engaged in. Finally, operating exposure is the extent to which fluctuation in exchange rates determine or affect the future cash flows of the business. For Vibrant Ltd to safeguard itself from these risks, it must consider creating an effective hedging strategy. Political risk and other risks i. Economic conditions in Japan will primarily determine market demand. Study of the market conditions is necessary to determine the viability of the takeover. ii. Political changes should be considered. The more politically stable a country is, the less likelihood of cash-flows variability. iii. It is critical to analyze the Pharmaceutical industry in Japan in order to evaluate if there exists positive growth and competition. iv. Market conditions sometimes result in substantial swings in the stock valuation of the acquired firm. Market stability in Japans Nikkei should be evaluated when developing a hedging strategy to shield Vibrant Ltd from undervaluation or losing shareholder value. v. Study of the corporate tax regime in Japan is also necessary in assessing the value of Galaxy Pharma. Sources of Finance Vibrant Ltd can raise finance for the acquisition of Galaxy Pharma through a number of methods. Financing of the takeover is a huge risk that Vibrant Ltd need to handle well, as it may leave the company exposed with little liquidity. This means that Vibrant Ltd must consider more than one source of funding without putting the current business ventures into strain. Vibrant Ltd can raise funds internally or from external sources. Internal source will include share capital, reinvestment of retained earnings or loan from the parent company. External sources are: i. Commercial Banks - Commercial Banks will provide the required finances for international expansion in foreign currency. ii. Discounting of Trade Bills - Discounting of trade bills is a short-term financing method that many business organizations can enjoy. This method is widely used in Asia and Europe, and therefore, it is a perfect method for short-term finance for Vibrant Ltd iii. Euro-currency Market – When the currency is deposited outside the country of origin.  It is termed as Euro-currency.  This is also an ideal source of business finance. iv. Euro-bond Markets –Vibrant Ltd can obtain finance from the Euro-bond markets. In contemporary business world, Euro-bonds have emerged as a significant source for capital investment. They are denominated in currency other than that of the country in which they are being sold. v. Development Banks – Financing can be obtained from development banks which operate in many countries. They fund large companies and large projects. The investment needs of Vibrant Ltd qualify them to get a long term loan from a development bank. vi. International Agencies – Another common source of finance in large companies such as Vibrant Ltd is international agencies including the IMF, World Bank, European Bank among others Recommendations It is advisable for Vibrant Ltd to consider the above benefits and challenges (risks) during its international acquisition. Riskiness refers to the uncertainty that affects the success of a business in a foreign market. Any business willing to acquire another company must carry out a market analysis to determine the viability of such a move. Factors to put into consideration include the source of finance, risks and benefits. These among other factors affect the acquisition of a business. In addition, Vibrant Ltd need to understand the political leadership and judicial system impact the investor’s wealth and profitability. Conclusion The above report has clearly demonstrated that acquisition is an ideal strategy for a company that looks forward to expanding its services to other regions. A careful evaluation of risks as well as benefits will enable Vibrant Ltd to successfully acquire Galaxy Pharma, a Japan-based pharmaceutical company. International Acquisition of Galaxy represents great value to Vibrant Ltd as it will increase its market share in the Japanese pharmaceutical industry. Reference List Brigham, E. & Daves, P., 2007, Fundamentals of financial management, 11th edn, New York, Thomson Higher Education. Brigham, E. & Daves, P., 2009, Intermediate Financial Management, 10th edn, London,Cengage Learning. Campbell, H., 2004, When Good Law Goes Bad: Stanley Works’ Recent Dilemma and how the Internal Revenue Code Disadvantages U.S. Multinational Corporations Forcing Their Flight to Foreign Jurisdictions, Syracuse Journal of International Law and Commerce, 31(95), pp. 95-120. Delaney, C., Rich, S. & Rose, J., 2008, Financing costs and NPV analysis in finance and real estate. Journal of Real Estate Portfolio Management, 14 (1), pp. 35-40. Götze, U., Northcott, D. & Schuster, P., 2008, Investment Appraisal: Methods and Models, 1st edn. Berlin, Springer. Hansen, D. & Mowen, M., 2007. Managerial accounting. 8th ed.: Thomson, South-Western. Hebous, S. & Weichenrieder, A. J., 2009, Debt Financing and Sharp Currency Depreciations: Wholly vs. Partially Owned Multinational Affiiates, Unpublished. Kinney, M. & Raiborn, C., 2011, Cost Accounting – Foundations and Evolutions, 8th edn. London, South-Western Cengage Learning. Shapiro, A. C., 2014, Multinational Financial Management. 10th edn, New York, John Wiley and Sons, Inc. Srivastava, R. M., 2008, Multinational Financial Management. 1st edn, New Delhi, Excel Books. Read More