Global Acquisition
Introduction
Alphax company is a soft drink company based in Paris France. The company is involved in massive production and marketing of a wide range of energy drinks in five countries in the Eurozone. The product portfolio of the company includes Flavor, Skipps, Booster, and Niace. Alphax is also engaged in manufacture of sports drinks such as Switzer, Ebezeer, and Footer. The company has over the years built its reputation by continuously producing quality products that meets varied consumer needs. This has enabled the company to become one of the leading soft drinks companies in Europe specializing in energy and sports drinks.
Eurozone crisis
The unprecedented economic turmoil in the Eurozone is causing a lot of economic mayhem in member states. The Eurozone is indebted and this has had profound effects on the financial sectors. Banks are no more willing to lend companies in the Eurozone as a safety measure minimizes the effects of economic crunch. Though member states have intervened to salvage the situation, the future picture of the situation cannot be clearly evaluated. Many companies operating in the Eurozone have suffered immensely due to this situation (Oxford 1-3).
Alphax soft drinks manufacturers have not been left out. The company has suffered severe loss because of the financial crisis in the Eurozone. In pursuance of its broad growth strategy, the company has extensively broadened its market coverage. The company has heavily invested in several European countries in terms of setting up of subsidiaries to reinforce its parent company. These subsidiaries have played a major role in ensuring that the company stays on track in terms of growth and sustainability. But things have not been so soft for the company in the last three years after Europe was hit by financial crisis.
Alphax soft drinks manufacturers operate in different countries in Europe. These countries include two Iberian countries, that is, Portugal and Spain. Additionally, the company also conducts business in Greece and Turkey. It is good to recognize that the company has witnessed a slowdown in growth due to impact of recession that hit Portugal, Spain, and Greece. This slowdown is particularly pointed at Spain which has been the biggest consumer of our products. The company has recorded stagnated sales in the Iberian markets and declining revenues particularly from the Spanish market segment. These events have crippled the operation of the company and have left the sustenance of the company to solely depend on the home market in France.
Besides the financial crisis, the company has also faced a number of challenges in the European market. These challenges have also constrained the company leading to stagnated income and growth in the last five years. This has been caused by stagnated demographics, changes in consumer preferences that hard to determine, declining income elasticities due to growing income levels, and stiff competition in the soft drinks industry (Filippaios and Rama 59-60)
For the last three years, the company has been exploring various strategies to save the company that is on the brink of collapse. The strategies committee was appointed to work out on a number of strategies that are essential for turnaround of the company. After various consultations the strategies committee recommended three broad based growth strategies to the company management. The recommended strategies include mergers, acquisition, and setting up new subsidiaries in a country outside Eurozone.
Brazil economic overview
Brazilian economy is rated presently as one of the fastest growing economies in the world along with countries such as China and India. However, it has gone through turbulent times to reach this status. Back in the 1980s, Brazilian economy was among various economies in the world that were severely affected with heavy debts. This debt crisis caused economic ripple in Brazil economy that were responsible for prolonged spells of inflation. The economy stagnated and did not record any positive growth for a very long time. By the year 1993, inflation had reached an alarming percentage of 2,851.3 (De Oliveira, Augusto and Nakatani 39).
During the same period the Brazilian government developed a raft of measures in an attempt to overcome the impacts of debt burden. This plan was laid to tame worsening economic conditions. After the end of militaristic government in early 1990s, President Lula’s government opted for neoliberal program and subordinated economic growth fundamentals in order to address the economic crisis at that time. However, this approach was not successful because of it further accelerated economic disintegration. This led to changes in microeconomic policy that gave priority to taming “inflation, allowing free-floating, and generation of primary surplus to avoid more debt” (De Oliveira, Augusto and Nakatani 40). These changes reduced external vulnerability of Brazilian economy. This impressively reduced foreign debt percentage and curbed inflationary patterns.
The reduced external vulnerability encouraged by the privatization of many state owned companies and the emergency of other private sector companies led to a rapid structural changes in the economy. Agricultural and services sectors expanded which had a net effect on the expansion of export trade. This saw an increase of exports from as low as 0.95 percent to 1.96 percent between the year 2000-2008. The internationalization of some Brazilian companies and increase in trade surplus has over the last decade has positively contributed to economic development (Baumann 34). Additionally, the opening up of Brazilian economy to external investments opened the economy to multilateral trade that instigated economic growth. This increased GDP from an average of 13.6 percent in 1990s to 21.5 percent between the years 2000 to 2008 (Baumann 33).
Why Brazil
The company, after analysis of various options decided to choose Brazil on a number of reasons. Firstly, the Brazil is one of the fastest growing market economies in the world and therefore, the company wants to take advantage of the opportunities are available in the economy. Additionally, Brazil is one of the countries in the world with clear foreign direct investment policies coupled with macro stabilization and political stability providing an enticement for investment (Baumann 34). The internationalization of Brazilian “entrepreneurial group and the short term financial requirements in foreign currencies” (Baumann 43) presents flexibility of doing business in Brazil. Above all other arguments in favor of Brazil, it decision to select Brazil was not debatable because Brazil is hosting the 2014 FIFA world cup and this present an opportunity of investing in sport energy drinks. The management was of the opinion that the company need to be present in the country before this major sporting event so as to take full advantage of the opportunity. Furthermore, Brazil has remarkable preferential trade agreements with various countries in Latin America and the world at large and therefore working within the economy will be advantageous to the company in that it will be easier to market our product to other Latin America while operating from Brazil (Baumann 42). The company also considered the cost involved in operating in Brazil and found out that there are significantly lower transportation costs and the similar demand structure that will enhance growth of our business.
Selected strategy
The management has decided pursue a global strategy as a way of expanding the business to different markets in the world. In particular, the management chose Brazil as the potential market of expanding the market of energy drinks to ensure sustainability. The management has settled for acquisition strategy as the best alternative in reaching out to the Brazilian markets. It is better to recognize that this is not the first time that the company is undertaking acquisition strategy. The growth of Alphax Company has been predominantly through regional acquisition of firms in same line of business. While arriving at this conclusion, the management based the decision on previous experiences on acquisition. Though outside the continent, the management thought it was better placed to execute acquisition of a local firm in Brazil basing on company experience with such venture.
Additionally, it is observed that acquisition best fits the overall company growth strategy in a number of ways. Alphax Company overall strategy requires the firm to initiate various ways of ensuring that the firm remains competitive in the market place. Furthermore, the above strategic aim is compounded by another firm objective of achieving strong and sustainable market leadership position through building adequate firm synergies. Acquisition is capable of sustaining the company through provision of alternative measure that ensure profitable growth, and production of quality products to meet consumer requirements. Acquisition is taken as the appropriate avenue through which the company will access new market in a cost effective way and make its presence felt as quick as possible. This will guarantee path back to profitability hence the realization of the company growth and sustainability.
Schincariol Company
The management has decided to acquire Schincariol Company soft drink unit after the Schincariol Company decided to divest from soft drink business unit after Kirin Brewery Company acquired the brewery unit of the company last years. The management saw this as a great opportunity for reaching Brazilian market. Schincariol Company is one of the largest companies in the beverages industry in Brazil and competes favorably with giant market leaders in Latin America such as AmBev and Grupo Petropolis. The company has been in business for more than the last 70 years and has established market network for its energy and sports drinks in Brazil and the Latin America at large. The company main plant is located in Sao Paulo which is nerve of economic growth of Brazil. Additionally, the company has manufacturing plants spread out throughout the country and an extensive distribution centers across the whole region and United States. The well-known energy drink produced by Schincariol Company is Skinka. Skinka is a strong brand of energy drink and widely used in Brazil, Peru, Argentina, Bolivia, Chile, and Uruguay. At the time of negotiation for this acquisition, Schincariol Company had released another brand energy drink, Frutis, into the market. The company identified Schincariol Company as a way of building on the good reputation to reach out to the expansive Brazilian market.
Capital budgeting
Capital budgeting is a very instrumental element in business planning, investment, financing and operation. Companies plan for acquisition of valuable assets through capital budgeting. Capital making process is a very sensitive issue because it deals with large sums of money (Moles, Parrino and Kidwell 395). Analysis of acquisition capital budgets is a critical area in decision. Capital budgets are strategic decisions that require large capital outlay and have to be prepared to properly (Baker and Gary 193).
In the preparation of acquisition project budget, various financial considerations have been applied. It is company policy that project budgets that are over €0.5 million are approved and handled at corporate level. Project at Alphax Company are classified as either profit generating or profit maintaining. An acquisition project that the company wants to undertake at this particular time is a profit generating activity. The company has allocated a total sum of €70.5 million to the project. The strategic committee considered various underlying risks that the project is likely to face. The project budget provides for adjustments in priorities during the implementation of project as a way of accommodating changes that will be necessary to mitigate potential risks. The project has been carefully reviewed by evaluating the payback period as major way of dealing with uncertainty of the project. The evaluation has been done by looking at the net present value, annual rate of return, and terminal rate of return.
The total sum of €70.55 million is dedicated to this project. €48.2 million is dedicated to the purchase of the manufacturing plant from Schincariol Company. There are a total of seven plants that the company has decided to take over. The company is going to spend an additional amount of €10.5 to refurbish and upgrade the plants to meet company specification. A total amount of €0.25 million has been allocated to cater for incorporation and legal process for the registration of the company. The costs of adjustments and operational change costs are estimated to cost €0.15. Development of new information technologies systems and other technical issues are approximated to cost €0.1 million. The company has recognized that the takeover is going to cause retrenchment, voluntary early retirements, and other human resources issues and has therefore dedicated €0.5 for compensations and other payments. Advertisements, public relations, and staff hiring and training has been allocated a total sum of €10.5 million. €0.5 million is dedicated to covering costs related to logistics, audit, signage, publicity, and other miscellaneous expense.
The management has agreed to finance the acquisition through a bank loan. The financial and economic crisis in Europe has resulted in credit squeeze in the financial sector (Humel 1). The rates charged by banks on loan lend out to companies has cheeped up hence making the cost of credit to jump up. Furthermore, the banks have tightened credit conditions restricting their lending to fixed amounts of money (Hume 1). The management, consideration of the above circumstances, has decided to borrow from Brazilian banks.
Potential risks
The company management recognizes the fact the acquisition the project is bound to be affected with some risks. These risks may be brought about by the uncertainties in project parameters such as cash inflows and outflow, annual net value, terminal values, and foreign exchange rates (Zhang, Huang and Tang 4558). The management also realizes that there are some risks that can be hedged and those that cannot be hedged. Therefore, the company is preparing for such eventualities with great enthusiasm.
Foreign exchange risks that are likely to face the company are operational and markets risks (Goldberg and Drogt 49). In a move to deal with foreign exchange risk the management has decided to focus on core business issues and challenges as a way of reducing the volatility of earnings and cash flows. This is going to reduce the likelihood of the firm experiencing financial distress as a result of low cost of capital thereby guaranteeing access to credit in Brazil. The company is also going to use derivative instruments to lower funding costs. The company will use currency swap to hedge against exchange rate risks. Forward contract hedge derivative, a short time strategy, will be used to enable the company purchase specified amounts of Brazilian dollar at specific rate. Forward contracts will enable the company hedge sales and purchase transactions allowing the company to settle its contracts within time.
A natural hedge will be used when the company to match cash inflows in Brazilian dollars. This will be done by adjusting the production levels to respond to fluctuation in the foreign exchange rates. This will allow the company to pay suppliers with the Brazilian currency the company will derive from sales of the energy drinks. The company identified credit risk as risk that the company will not be able to hedge. This was arrived at by recognition that if other instruments fail, it will result in loss to the company due to exposure to exchange rate risk.
Currency swap
Hedging strategy was adopted by the company to avoid risks in the long term during the running of the project. The aim of the strategy is to protect the project from the impacts of increase in foreign exchange rates and increase in interest rates. Additionally, the swap is designed to prevent the project from stalling and not to default during inflation
Brazilian dollar Libor
Euro Libor
Euro Principle at end
Brazilian dollar at the end
Euro Principle
at end
Raw material hedge
Fruits will be the major raw material that will utilized in the production of energy drinks. Fruits will be sourced from the farmers and company plantations that are going to be set-up. Agricultural production is robust in Brazil due to the support that the governments extend to farmers through subsidies. Government support for agricultural production has expanded agricultural exports and therefore, there are possibilities that prices of agricultural activities are likely to rise in future as local consumption competes with export market. The company is prepared to hedge against price risk through future contracts (Fu, Zhang, Zheng, and Zhang 1070). Future hedging will be implemented through contracts with farmers who will be chief suppliers of fruits. Future contracts will prescribe future price agreements between the firm and farmer to tame impacts of price fluctuations.
Pros and cons of the project
Firstly, the project brings back the company to a path of growth through expansion market. Additionally, the project will enhance company profitability especially after three years of on negative returns. Furthermore, the project will result in expansion of business portfolio thereby guaranteeing increased value to company shareholder. Lastly, due to increased profitability, the project will enhance company sustainability. The management has only identified the large capital outlay as the only demerit of the project. The project will require large capital outlay and this may negatively affect the operation of business units in Europe.
Conclusion
The company management has decided that the company should go ahead with the project. This is after various strategic high level consultations on the feasibility of the project. The management has found out that the project is viable and guarantees company growth and sustainability. The attractiveness of the project location is also another factor that was greatly based when arriving at the final decision. The company acknowledges that the project is bound to be affected with a number of risks and therefore, it has prepared for such eventualities.
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