Possibility of Vibrant Limited Acquiring a Japanese Company Galaxy Pharma - Case Study Example

International Management Name Course Institution Date Executive Summary This report assesses the possibility of Vibrant Limited acquiring a Japanese company Galaxy Pharma. Galaxy Pharma is a Canadian company that deals in pharmaceuticals. This report evaluates the various risks and returns that are involved in this deal in order to allow a feasible decision to be reached. The report therefore analyzes all factors that will influence the decision of the buying company on the possible acquisition. The purchase price and financial position of the Galaxy Pharma have therefore been extensively analyzed. In addition, foreign direct investments are also evaluated to clearly demonstrate the implications of such ventures in the business world. Letter of Transmittal Dear Manager, This is to officially notify you of the findings that have been compiled in connection with acquisition of Pharma Galaxy Company. The report highlights the key aspects that are supposed to influence the decision making in relation to the planned deal. Key Benefits The company stands to benefit from an already existing market to sell its products The company being acquired has a good working capital base making it easier to undertake operations afterwards It is the cheapest option the company can use to venture into Japanese market since there are no tariffs and other indirect levies that will be involved. The information from the income statement shows that the company is performing well financially The company stands to benefit from Japanese workforce working together with others to ensure high productivity Risks The deal requires cash to be executed and this can be technically tricky if Vibrant Limited does not have sufficient cash reserves. The element of political risk remains a concern to the management In overall, the deal is quite costly and it requires heavy financial power to be accomplished In the process of coming up with the above report, it must be noted that a lot of materials were involved in trying to analyze every fact presented. The support accorded to me in relation to providing relevant information from stakeholders is truly appreciated. The reality about this exercise is that it has been very rewarding in terms of the experience and skills gained in the process. All this was achieved because of the support I received. Indeed I am very grateful to everyone who made it succeed. Yours Faithfully, Student’s Name Introduction Acquisition is a common term used to refer to the process that enables a company to acquire a stake in another company. In different cases, the company can acquire either part or whole of the stake so as to exercise control over the company. This is basically a growth strategy applied mainly by multinational companies. It is easier and more feasible acquiring an already existing business entity than starting a new operation (Jeffrey & Michael 2000, p. 210). This transaction can be either by cash or by equity. Vibrant Limited in this case is the one which is acquiring a stake in Galaxy Pharma. This is definitely an impressive move in relation to overall growth strategy of the buying company. Nevertheless, it is important to consider a number of issues relating to this deal that the company intends to be involved in. Analysis Benefits Another aspect in analysis of this company is the working capital. The company has a working capital of Yen 30250 million with 40% of it being cash. This is very liquid and this implies that the operations of the company will be easily necessitated. When Vibrant Limited takes over the management of this company, it will not struggle with handling operational activities. Because of this, the parties involved in the negotiations that lead to acquisitions are always keen to discuss the element of working capital upfront (Yusuf, Christopher & Ulrike 2008, p. 285). With good working capital, the acquirer in this case will find it easy to meet the pending obligations with either customers or creditors. The financial performance of Galaxy Pharma is closely linked to the working capital. For instance, the previous year’s income which stands at Yen 4551 million was driven by the working capital of the company. On the hand, the information on the company’s income statement hints at good returns. The company recorded an income of Yen 4551 million during the previous financial year. This is quite impressive considering the value of assets that generated this income. From the information provided, less than Yen 40000 million is what gave forth 4551 million. There is more potential that this business entity can exceed its productivity based on the strength of its balance sheet. The liquidity of the enterprise is a real pointer to productivity and better returns. The acquiring company simply requires putting strategies in place to ensure that after acquisition, the performance does not slow down. The financial information provided indicates that there is a good possibility that Vibrant Ltd can break even within a relatively shorter period. This means that the company may actually afford to recover all its expenditures on acquisition within a considerably shorter period of time (Bai, Ramayya, Rema& Harry 2013, p. 740). The benefits that emanates from the company’s decision to acquire another company from a different country can be lucrative. Since Vibrant Ltd is taking over an already established company, it enjoys a series of benefits. The company is allowed to use the brand name of the acquired entity in the new market (Bai, Ramayya, Rema& Harry 2013, p. 738). This can be very rewarding especially if the acquired company had a strong brand name in the market. On the other hand, if the company’s name had a bad reputation on the market, it may cost the acquiring company dearly to clean it. At the same time, since the company will be doing business on the same market, it is much easier to strategize on how to dominate the market. In most foreign direct investment of this kind, it is company enjoys privileges of sourcing materials. Similarly, the company will enjoy the technology that is exploited in the foreign country. All these benefits are expected to be translated into financial gain for the company. In evaluating the working capital, 40% of the total value of assets in Galaxy Pharma is in form of cash. Since this asset is in a liquid form, the risk of translation must be considered. In this case, since this cash will be used in running the business, there is no translation risk involved.On the other hand, the transaction is being undertaken in cash. The Canadian company is expected to translate this money into the Japanese Yen in order to effect the transaction. Nevertheless, since this deal is expected to be executed immediately, the issue of translation risk does not arise (Alan 2002, p. 91). In this case, the entire amount is paid in cash. Accordingly, this deal is free from transaction risk since it is undertaken in cash. This is therefore is a good deal for the acquiring company. Risk Elements It is a bit complicated to address the translation risk that is attached to the fixed assets of the company. The balance sheet of the acquired company has the fixed asset value of Yen 8337 million. In order to evaluate the translation risk, it is important to consider the historical rate of translation. Unfortunately, in the circumstance where the assets were acquired long time ago, these figures could bear a greater risk to the buying entity (Michael & Edward 2007, p. 679). When a company is taking over assets that were acquired long time ago, it becomes riskier since there may exist a lot of disparity between the historical rate and the prevailing rate. Therefore, it will be important for the buying company in this contractual agreement to find out these details as it works out the way forward for executing this deal. Seeking more information is one way of ensuring the possible risk is minimized as much as possible. In addition, the acquiring company ought to consider its liquidity level before sanctioning this particular deal. In this case, the whole deal is supposed to be executed using cash alone. This implies that the buyer must have floating cash to effectively undertake this venture. It is upon this company therefore to assess its cash reserves and other reserves in order to ascertain its fitness in relation to undertaking a deal of this kind (Jeffrey & Michael 2000, p. 212). Failure to carefully evaluate its cash reserves and the ability to meet that cash required as spelt out in the buyer-out clause can be disastrous to the acquiring company. If the buying company does not have adequate cash, it runs the risk of interrupting its operations during the financial year. This is because every organization requires cash to run its daily transactions. Vibrant Limited should not use a lot of cash in its reserves to a level where its operations are stalled. Besides, another consideration must be the political risk facing the entity. According to the deal that has been prescribed, Vibrant Limited is interested in having operations running in Japan. Since the newly acquired company will be operating in japan, Vibrant Limited must carefully assess the political risk involved. The political waves in the country bear direct implications to the business of this kind (Simon, Ming & Jane 2013, p. 680). When a country is facing political unrest, it is advisable for the buying company either to delay the deal or to cancel it. The high political unrest increases the risk that the business may collapse. This is the reason Vibrant Ltd must be very careful to assess the trends in Japan before progressing. For instance, it will be important to find out how soon the general elections are likely to be held. This is because in most scenarios, it is around election seasons that many things are bound to happen. The possibilities of a business collapsing at that time are very high. Recommendation In order to make appropriate recommendation on the suitability of this acquisition deal, it is important to consider all critical issues involved. In this particular deal, just like any other given deal, it is important to consider both the risks and the potential returns streaming from the deal. According to the information that has been given in this particular deal, it seems lucrative for Vibrant Ltd to take up this deal. The risks that are verifiable in this given deal are minimal indeed. Perhaps the only consideration that the acquiring company must be keen on is the liquidity level. Since this deal is executable in cash, it is just important for the company to ensure there is sufficient cash in its reserves otherwise it can frustrate its operations. In general, the returns in this deal seem to exceed the risks that are involved. The possibilities of the company succeeding in the foreign country are very high. At the same time, the returns that the company is likely to make are quite impressive. Therefore, it will be good for Vibrant Ltd to seal this deal. Conclusion The current competitiveness in the market warrants entities to be more proactive in their approach to business in order to remain relevant in the industry. One of the options through which firms can create a competitive advantage is through acquisitions and mergers. These enable the company to widen its market with much ease. Vibrant Limited has a chance of establishing its dominance in the market through the same strategy. It is therefore important for the responsible persons to analyze the report appropriately and make a decision on what is deemed to be in the interest of the company. References Alan, M. E 2002, Quality Assurance and Risk Management in On-line Medical Discussion Groups .American Journal of Medical Quality, 17, pp. 89 - 93. Bai, X., Ramayya K., Rema P. & Harry J. W 2013, On Risk Management with Information Flows in Business Processes,Information Systems Research, 24, pp.731 - 749. Faiad R., & Jason M. 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