International Engineering Management - Vietnam TNA - Case Study Example

Intеrnаtiоnаl Еnginееring Маnаgеmеnt Name Course Instructor Date Executive summary Globalization has opened doors for companies to expand and exploit opportunities beyond their borders and companies employ different criteria’s when in need of expansion in order to acquire control of a larger market. Vietnam TNA has pinpointed a loop hole in the food manufacturing industry and identified a struggling small company ready to allow take over to avoid further losses or facing impossible competition. However funding is needed for the takeover and further investment in the machinery to revitalize the company to a level it can sustain the present competition in the food processing industry. Several source of funds are considered such as bank loan, equity, government subsidies/loans and retain earnings. At the same time to determine the business process viability and its ability for long term growth, the concept of capital budget valuation is exploited. The report will therefore analyses various source of capital and the viability of the business idea. Table of Contents Executive summary 2 Table of Contents 3 1. Introduction 4 2. Source of Funds for TNA 4 2.1. Bank Borrowing 6 2.2. Government Funding 6 2.3. Capital Markets 7 2.3. International Financing 9 2.4. Raising Funds from Investors 9 2.5. Capital Budget Evaluation 10 10 4. References 14 Appendices 16 1. Introduction Companies employ different methods to grow and dominate the market. Acquisition is one easy and very stable method of expansion and market domination. This is because the most acquired companies are already strategically located and the process only need improvement techniques. In its quest to dominate the food and processing industry in Asia, TNA has already identified a small manufacturing company in Vietnam that is currently suffering from stiff competition. This provide a good investment opportunity advised by the TNA agent in Vietnam who find the cost of acquisition plus improvement cost to be approximately 10A million. The report therefore analyses the potential sources of fund to invest in this business venture and the capital valuation for the business venture. 2. Source of Funds for TNA Finance is one important resource in business especially in cases where large capital outlay is needed for expansion through acquisition. The various financial sources offer varying terms especially in term of repayment period and interest rate involved. Therefore the choice of fund has to be properly discussed and the best method that is practical possible at the time implement. Large scale investment boast of several capital sources such as the capital markets, Loan stockRetained earnings, Bank borrowing, Government sources, Business expansion scheme funds, Venture capital and Franchising. Based on the fact that the current financial position of TNA Vietnam is never known, and the time needed for the expansion is limited, then the best financing method falls between retained earnings, bank loans and possibly through venture capital. The first possible option is use of share system. This can either be through ordinary shares system or use of the preference shares which is known to have fixed divided. The ordinary shares are the contribution of the business owners and can be achieved through further right issues or investment of retained earnings. This is because the ordinary shareholders normally share the percentage of the company through dividends and they can decide to further invest it to act as contribution in the expansion (Fao.org, 2014, Pg. 2). The method is more close to the venture capital system where the business owner invest more out of his/her pocket in return of an equity stake in the business.The second option is financing Vietnam TNA through retained earnings in case the company has considerable amount. This are profit re-invested hence enjoy the advantage of zero interest rate and at the same time issue cost is avoided. Moreover, the possibility of change in control that can come with new shareholders is avoided. The third option is bank lending which is mainly short term though medium term can sometimes be offered. The bank loan can be in the form of an overdraft and the interest is charged on the amount overdrawn and the short loan can last up to three years. However, banks are normally sensitive on issues such as the loan purpose, amount, repayment terms and the security accorded. The fourth option is a leasing which is a kind of rental. The company will agree with a bank to pay the owner of the small company to be acquired a given amount of money which Vietnam TNA will repay in installments (Fao.org, 2014, Pg. 2). The last option is government is government involvement through grants and that is normally part of the national development policy of many countries. 2.1. Bank Borrowing Bank borrowing provide one of the best options of obtaining funds for investment and in this case Vietnam TNA basically have every qualification the bank requires. This is because issues like the loan purpose are clear and logical and the company can use its other assets of the current company as security to obtain the loans. The company therefore faces a potential challenge of looking at other sources of financing since bank loans are already exhausted with the available bank loan in Vietnam constituting only 60 percent of the total loan required by companies. According to (Saidenberg and Strahan, 2015) though the latest trends show a shift of companies obtaining finances from other methods such as securities, bank loans are not yet completely neglected and investors readily turn to bank loans during economic problems. Risk management is necessary because of the repercussions of failure to service bank loan since asset acquisition can be one of the options leading to property loss. Bank loans is known to cause financial strain since it is an extra debt. 2.2. Government Funding Vietnam TNA has an option of obtaining financial support from the government start up and entrepreneurship support options. Vietnam is at a point in time where the government have high interest in initiating economy growth through spending on inventions and business enterprises. The government of Vietnam therefore liaises with institution like National Agency for technology (NATECD), National development innovation fund (NATIF), The Finland Vietnam innovation partnership and Vietnam silicon valley.Vietnam silicon valley placed aside USS$ 1O,OOO to 20,000 for startups (Pedigo, 2011). Through NATIF the government support technological innovation and foreign expertise for technological innovation but since many business are present, NATIF loans are very competitive. However, the Australian government through Mekong business initiative (MBI) and funded by Asian Development Bank (ADB) and Australian government to support private sector development in Asia. Therefore the government can use many option to offer investment fund to expanding firms and start-ups. 2.3. Capital Markets Vietnam capital market is new but picking up well. However, the bond market and other players in the capital market still need investment to stabilize. Vietnam still depend on the international funding options to stabilize its own capital market. The figure shows the progress of major capital market players like bonds and Bank credit. Fig 1: Vietnam market capitalization performance (Hung, 2016, Pg.143) The capital market in Vietnam began in 2000 immediately after the upgrading of Ho Chi Minh stock trading center to Ho Chi Minh exchange. At its inception, only seven companies were listed and the number grew significantly to 500 listed companies in 2011. The companies cumulatively have a market share capitalization of 30 percent of the Vietnam GDP and the bond market growing to 15 percent of the GDP (Chance, 2013). The growth has been phenomenal, however, the Vietnam capital market still lag behind compared to other Asian countries such as Singapore. The Vietnam capital market faces challenges such as improper vision and well structure policy in the financial sector and insufficient financial information or statistics shared amongst the relevant stakeholders (Hung, 2016, Pg.142). 2.3. International Financing International financing option are available in Vietnam and Vietnam TNA can access such funding’s through bodies like Mekong Business Initiative (MBI) which is in partnership with international funding bodies like Australia government and Asia Development Bank (ADB). MBI provide funds for private sector funding and the project is funded by Technical Assistance Special Fund (US$ 500,000.00) and ATF – Australian TA Grant (US$ 10.00 million). World Bank through research science and technology (FIRST) provide funds for business enterprises and research development at a cost of US$ 110 M and it runs from 2014 to 2019. Considering the local funding in Vietnam is already flooded with the local banking lending hitting a record 135 percent of the Vietnam GDP, international option provide a better option. Other possible sources of international finance are: Eurobonds, international finance corporations, company loans and international equity market (Funding the International Business, 2016). 2.4. Raising Funds from Investors Investor’s provide a good option when raising money for a new venture in a new environment like Vietnam TNA intended to. However, the investors need to feel the potential of the project in respect to its viability (Bernstein, Korteweg and Laws, 2014, p.13). Therefore the major concerned of investors will be how much money is required, the potential success of the business proposed, legality and return on investment. There are three different funds that can be obtained from investor namely equity, loan and convertible. Investors who contribute to the company inform of equity get a stake of the company in exchange. It is lucrative since no repayment terms is accorded and this type of financing is good in situation where long investment runway is needed, when the parties involved have zero collaterals and when the business is positioned for astronomical growth. Unfortunately equity narrow the business options, has high competition and the investors normally expect big rewards. The second options is loans which are paid later at certain agreed interest (Fundable, 2014, p.27). It is more ideal where the reason for the loan is tangible, the loan is needed quickly and the amount needed is not so much. Loans at times need collateral and a person can explore options since different lenders exists. Convertible debt is more of an intermediary between equity and debt in that in case repayment fails, it can be converted into share. 2.5. Capital Budget Evaluation Capital budgeting is just a financial process used to determine the long term viability of an investment. The investment in assets are to enable the firm generate revenue in the future and that is the same situation with the investment proposal Vietnam TNA is currently working on. By acquiring a small company at a lower cost and investing in the machinery, the company will enjoy long term benefits from the investment. The new machines invested in will enable TNA keep up with the competition considering that the location is ideal for investment. Calculation Underpinning revenue = A$200,000 This is the monthly revenue that the project will yield per month. It is multiplied by 12 to get annual revenue. It is then converted to Vietnamese Dong. Converted to Vietnamese Dong = A$200,000*17160.76*12= 41,185,824,000 After the conversion to Vietnamese Dong, the annual revenue for the other years is then computed using the sales growth. This results in the following annual revenues. Total revenue in Vietnamese Dong Year 1: 41,185,824,000*1.20= 49,422,988,800 Year 2: 49,422,988,800*1.30 = 64,249,885,440 Year 3: 64,249,885,440*1.30 = 83,524,851,072 Year 4: 83,524,851,072*1.2 = 100,229,821,286 Year 5: 100,229,821,286*1.1= 110,252,803,415 After finding the annual revenues, we deduct total costs of 60% for year one and 50% for the subsequent years. This results in incremental cash flows as shown below. Total revenue less total costs= incremental cash flows Year 1: 0.4*49,422,988,800 = 19,769,195,520 Year 2: 0.5*64,249,885,440 = 32,124,942,720 Year 3: 0.5*83,524,851,072 = 41,762,425,536 Year 4: 0.5*100,229,821,286 = 50,114,910,643 Year 5: 0.5*110,252,803,415 = 55,126,401,708 After that we convert the incremental cash flows from Vietnamese Dong to Australian dollars to allow us in carrying out the capital budget decision. However, for the final year, after the conversion, we add the estimated residual value so as to arrive at the terminal value. Then we convert the values into Australian dollars Year 1: 19,769,195,520/17160.76 = $1,152,000 Year 2: 32,124,942,720/17160.76 = $1,872,000 Year 3: 41,762,425,536/17160.76 = $2,433,600 Year 4: 50,114,910,643/17160.76 = 2,920,320 Year 5: 55,126,401,708/17160.76 = $3,212,352+200000= $3,412,352 after that, we find the present values of the incremental cash flows using a rate of return of 10%. We then sum, them up and deduct from the project cost to arrive at the net present value. This is indicated below.     Project 1   Rate of Return: 0.1     Project Cost: ($4,000,000)   Year 1 $1,152,000     Year 2 $1,872,000   Year 3 $2,433,600     Year 4 $2,920,320     Year 5 $3,412,352       NPV $4,536,200 According to the table above, the project has a positive NPV and should be accepted because it will result in higher returns. Based on the above evaluation, the takeover represents a good investment for TNA because it results in higher returns which will be beneficial for TNA. What would be the situation if the investment required was only A$ 7 million? Using the allocation above, $A 6 million for the purchase of 100 percent of the Vietnamese Company and $A 4 million in the form of capital equipment, $A 7 million will be distributed as follows: Purchase of 100 percent of the Vietnamese Company = 0.6*7 million = $A 4.2 million Capital equipment = 0.4*7 million = $A 2.8 million. So the situation would be:     Project 1   Rate of Return: 0.1     Project Cost: ($2,800,000)   Year 1 $1,152,000     Year 2 $1,872,000   Year 3 $2,433,600     Year 4 $2,920,320     Year 5 $3,412,352       NPV $8,990,272 The project would result in a higher positive NPV which implies that the project is a good investment hence should be accepted. 3. Conclusion Vietnam TNA is lucky to find a willing company to sell its facility. This is because acquisition position a business for competitive opportunities with its competitors and in the same aspect provide cheap means of expansions. Various sources of financing is open and possible hence is upon the management determine which type of financing is the most viable considering the available conditions such as collateral availability, the amount of cash required, the repayment time, repayment methods, viability for growth, legal obligations and the willingness of the owners to share control. From the capital budget valuation, it is clear that the expansion opportunity is viable and should be carried out as it has positive NPV. 4. References Bernstein, S., Korteweg, A. and Laws, K. (2014). Attracting Early Stage Investors: Evidence from a Randomized Field Experiment. 4(3). Chance, C. (2013). Vietnam Investment Guide Capital Markets. 3(2), pp.12-34. Fao.org. (2014). Chapter 7 - Sources of finance. [Online] Available at: http://www.fao.org/docrep/W4343E/w4343e08.htm [Accessed 1 Oct. 2016]. Funding the International Business. (2016). Boundless, [online] 3(2). Available at: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-management-outside-of-the-u-s-21/international-investment-and-finance-141/funding-the-international-business-563-4339/ [Accessed 1 Oct. 2016]. Hung, N. (2016). Vietnam's capital market: young and growing. 4(3). Pedigo, S. (2011). 3 Ways the Government Can Fund Your Business. [online] Inc.com. Available at: http://www.inc.com/steven-pedigo/how-to-get-growth-capital.html [Accessed 1 Oct. 2016]. Saidenberg, M. and Strahan, P. (2015). Are Banks Still Important for Financing Large Businesses?. [Online] Available at: https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci5-12.pdf [Accessed 1 Oct. 2016]. Fundable. (2014). The Types of Investor Funding - Convertible Debt, Equity, Loans. [Online] Available at: https://www.fundable.com/learn/resources/guides/investor-guide/types-of-investor-funding [Accessed 1 Oct. 2016]. Appendices Appendix 1: Funding options Read More