Commercial Logic of Acquiring Mandrake Footwear - Coursework Example

?INTERNATIONAL FINANCE AND DECISION MAKING Commercial Logic of Acquiring Mandrake Footwear The decision to make acquisitions is taken by several companies in many parts of the world every now and then. Some of these decisions eventually proof to be vital and profitable while others turn out to be wrong decisions because they result in losses (Olsson, 2001). Fundamentally, the prediction as to whether or not a particular acquisition would be beneficial depends on a number of factors. Among other things, it should be possible to evaluate the commercial logic of the intended acquisition (Patra, Khatik, & Kolhe, 2003). If signals from the evaluation turn out to be bright, then the acquisition could probably be beneficial. In the case of Gear Active acquiring Mandrake Footwear, there are four major themes that can be used in evaluating the commercial logic and viability of the acquisition. These are briefly explained below. Ready Market with existing Customer Base Commercially, an acquisition such as the one Gear Active is seeking to undertake comes with the position whereby the acquirer has at his disposal, the ready market that the existing company had. They also have access to the existing customers of the companies that they acquired. This is an important commercial value that purchasers can build on as competitive advantages (Roy, 1999). To Gear Active therefore, there is this major advantage in acquiring Mandrake Footwear. Already, Mandrake Footwear has been identified as a major competitor in the footwear industry. The company is also seemingly larger than Gear Active. This means that Mandrake has created a very huge market base that Gear Active would only need to build on. The acquisition would therefore be an opportunity for Gear Active to record massive expansion over a very short period of time. Unlike what would have existed in a merger case, this acquisition would make Gear Active an outright owner of the acquired footwear company and so Gear Active would record a quantitative expansion that would more than double the size of the present state company. This expansion shall be in terms of asset capital, market base and customers. Existing Popularity The popularity of a company is an important commercial value that cannot be underestimated in anyway. Many companies have been able to develop their popularity to building a competitive advantage over rivals. Without any doubt, there are companies who have continued to top the chart of revenue makers not because of their present performances but because of the popularity they have created for themselves over the years (Sackmann, Flamholtz, & Bullen, 1989). In the commercial market, it is possible that the popularity of a particular brand of product would make the name of that brand stand for the product that the company manufactures. For example one of NESTLE’s a cocoa drink brands named Milo is so popular in most countries that people who want to purchase cocoa drinks from retailers actually say they are buying Milo even if they are not making specific reference to NESTLE’s product. With such a situation, the possibility that Milo would loss its market value is very low. The same situation applies to Mandrake and Gear Active in this instance. Clearly, the name that Mandrake has gained for its brand is enough for Gear Active to continue building on that name to its advantage. Opportunity to Access New Organizational Culture An organization’s culture is an important element for determining the commercial value and predicting the future success of the company in question (Sandervang, 2000). This is because the organizational culture goes a very long way to determine how the company deals with its customers, suppliers and wholesalers. It also refers to the employee-employer relationship that would go on in the company. These dealings are also very important in determining whether or not a company would succeed (Schmidt, Minssen, 2007). This is because they serve as service values for which these stakeholders would choose one company over the other. For Gear Active, the acquisition of Mandrake is an opportunity for the company to revisit its organizational culture. The company now has the opportunity of accessing new organizational culture by reviewing its existing culture by taking reference from Mandrake. This commercial value can however be created only under the circumstance that Gear Active does not only make a purchase of Mandrake Footwear and acquire its material asset but goes a step further to make time to study the organizational system of Mandrake. It is only under this instance that Gear Active can continue benefiting from the market and customer base that Mandrake has created. Without an ability to hold on to mandrake’s organizational culture, chances are that existing stakeholders would not want to stay on. New Line of Customers Another important commercial logic that is associated with acquisition of companies has to do with the introduction of new line of production and thus new line of customers. This is very imminent in situations whereby the two companies involved produce or trade in services and products that are not exactly the same (Schwarz, and Murphy, 2008). Between Gear Active and Mandrake, both companies are into the manufacturing of footwear. This means that on the surface, there cannot be much new line of customers. However, closer scrutiny of the various case situations of Gear Active and Mandrake would show that Mandrake’s target of the youth is more outstanding than that of Gear Active. This means that the class of youth who were not captured in the scope of Gear Active’s strategy would now be added to the line of customers for Gear Active. Yet again, much of Gear Active’s line of production has been based on the production of sports footwear as against non-sports footwear such as casual wears. This is therefore an opportunity for Gear Active to use Mandrake’s non-sports line to improve their non-sports line in footwear production. This is because though Gear Active produces non-sports footwear, it is not as highly anticipated as that of Mandrake. Opportunity to Double Revenue Earlier, it was reiterated that acquisitions lead to a situation whereby the purchasing company enjoys an outright expansion of the existing size of the company. This means that if the structural size of company A is 4% of the equity market and the size of company B is 3% of the equity market ; once company A purchases company B, the size of the new market in question becomes 7% of the equity market. Such outright expansion has the probability of being translated into revenue size also (Bullen, 2007). Gear Active is therefore now on the verge of experiencing such increase in revenue if the acquisition is executed. As far as revenues are concerned, Gear Active would now be in a better position to use its current size to gain investor and credit confidence to seek for more capital push for its company. This is likely to also lead to revenue mobilization and increase in revenue. Most often than not, companies that are small in size and existing revenue are not considered to be credit confident. Because of this, access to credit for expansion often becomes a huge challenge for them. But once the size of the company can be classified as large, credit confidence is boosted and access to credit becomes more assured. Increase Leverage with Manufacturers Clearly, a lot of the future successes of Gear Active depend on manufacturers and the kind of relationship that exists between the company and its manufacturers. In events of acquisition, research has shown that there may be the risk of acquiring company losing the customers of the acquired company because of changes in organizational culture and structure that may be experienced. Meanwhile, as far as manufacturers are concerned, the probability that manufacturers of the acquired company would continue working with the acquiring company is higher (Campbell, Owens-Jackson, & Robinson, 2008). The reason to this is that manufacturers keep the acquiring companies to their own good because the acquiring companies become customers for the manufacturers. This means that with the level of growth that Mandrake has experienced over the years, Gear Active stands a very good chance of increasing its leverage with manufacturers who otherwise worked for Mandrake footwear. The manufacturers who also worked exclusively for Gear Active also stand the chance of having their working morale increased because of the new height that Gear Active will be placed as a result of the acquisition. Such level of morale can also increase the leverage with the existing manufacturers. Modifications to be made to Linton’s projections Begin by Merging Linton’s quest so far could be described as remarkable. However, there are certain projections that should be made to get the present strategy modified. First of these modifications is for Linton to begin by merging with Mandrake for about four years before finally deciding to purchase the company. The justification in this point is that Linton and for that matter Active Gear would have been offered the opportunity to learn more about Mandrake and the influence the company would have on the revenue proceedings of Active Gear before taking the final decision of acquisition. This means that merger would come in as an experimental ground for what the eventual purchase would be. It would be noted that merging does not require as much start-up capital as acquisition (Loan Market Association, 2002). This means that even in the event of recording decline of sales as a result of the merger, Linton and his company would not really have so much to loss. What is more, mergers come with less legal obligations and so as soon as Linton finds out that the merger would not be of benefit to his company, he would be able to easily opt out of the deal. Maintain some Human Personnel One other important modification that Linton could consider has to do with the maintenance of a greater part of the human personnel available at Mandrake should he even decide to go ahead to make an outright acquisition. There are several justifications to this effect. The first has to do with the fact that most of this human resource have been on the job of Mandrake for several years and are therefore more familiar with the turn of jobs and activities at the workplace. For this reason, very little would have to be spent on resource development models like orientation programs because such workers who would be maintained would already be familiar with the running of the company. If this does not happen but the management of Active Gear decide to go in for an entirely new set of human resource personnel, a lot of cost will certainly go into their recruitment, orientation and on the job training (Standard and Poor’s, n.d). Maintain but revive existing organizational culture Furthermore, it is suggested that very little changes be made to the present organizational culture at place in Mandrake. The reason for this suggestion is in the fact that the company already has a very large customer base that has been very familiar with the existing organizational culture. For all that Linton may know some of these customers are still in place because of some of these organizational culture and its inputs. Any rapid change would therefore make such customers uncomfortable to continue doing business with the new ownership. In the midst of all these, Linton must take great care to ensure that the existing organizational culture if thoroughly reviewed and revived to ensure that any negative repercussions that some of them are eliminated. The review could best be done through a simple survey among some recognized and known customers and stakeholders in Mandrake. This simple research should aim at looking at ways of making the existing organizational culture better whiles maintaining the core values of it (The Georgia Bankers Association White Paper, 2003). Quantitative Modification Based on the current acquisition that has been purported for Active Gear, the following quantitative modifications are projected for the first two years of the company. Exhibit 2: Gear Active - Modified Balance Sheets for next 2 years 1st Year 2nd Year ASSETS: ?000's ?000's Property, Plant & Equipment 35,231 54 712 Intangible Assets 21,293 32 273 Goodwill 17,380 21 851 Other Assets 7 982 10 097 Total 81 886 118 933 Current Assets: Inventory 98 493 102 140 Accounts Receivable 86 507 111 649 Prepaid Expenses 18 298 22 051 Deferred Taxes 4 681 1 080 Derivative Assets 0 1 813 Cash 92 735 113 949 Total Assets 300 714 352 862 Liabilities Accounts Payable 55 711 29 188 Accrued Expenses 57 211 31 553 Taxes Payable 13 421 18 263 Other 6 514 1 100 Total Current Liabilities 132 857 73 004 Long Term Debt 78 173 0 Deferred Taxes 0 0 Shareholders ‘Equity (39 921) 8 216 Total Liabilities & Equity 250 951 161 324 The very simple justification behind the values is that as Active Gear makes purchases, the company is in an excellent position to increase their asset and by expansion their revenue. In the same vein, they have a better chance of erasing their taxes and most of their liabilities. It is for this reason that the assets will increase for the liabilities to decrease. Value of Mandrake as an acquisition candidate Existing Customer base and market Statistics available for Mandrake as a company favors the company so much in terms of being regarded as an acquisition candidate. It is common knowledge that most of the world’s worse failures in acquisition are those who made acquisitions without having time to really understand the market value of the acquiring candidate. As far as market value is concerned, a lot can be said in favor of Mandrake. For instance Mandrake has a very large customer base and market. In comparison to Active Gear for instance, it is known that Mandrake has a daily sales inventory of 61.1 whiles Active Gear has 42.5. This is a justification of how strong the customer and market base of Mandrake is. As a candidate therefore, Mandrake has such a large market value that would make the acquiring candidate very comfortable and assured of an ever ready market. Active Gear however plays its own cards well to ensure that these become merits that turns to its favor. Diversity of foot wear brand Between Mandrake and Active Gear, another point of value that cannot be overlooked is the fact that in terms of brand, Mandrake has a more formidable diversity of foot wear brands than Active Wear. Active Wear has been involved in the production of casual wear but that is not as formidable as what Mandrake does. After all, Mandrake started large scale market production of casual foot wear brands before Active Gear. This means that there is the value of diversity of brands. Active Gear and any other bidder who may want to consider Mandrake as a candidate has this benefit to his advantage because the more diverse the brand of products is, the more customers can be targeted by the company. The new comer therefore has to his advantage, the development of a new line of brand, which would be the casual wear and this alone would come with its own customer base and patronage. Competitive target group Still on the value of Mandrake as an acquisition candidate, it could be said that Mandrake has a very great value in its present target group, which is highly competitive. Presently, statistics on the foot wear industry and in the foot wear market shows that more companies are becoming more convergent in their approach in manufacturing (Standard and Poor’s, 2004). What this means is that most of these companies target only one set of market target group and channel their production at this target group. Meanwhile, Mandrake has a divergent approach that incorporates target groups including females, males, children, youth, old folk and even the disabled. This means that a competitive advantage is going to be created in the sense that unlike other companies where customers will be limited with their choice of footwear, almost every kind of person can walk into Mandrake and be assured of a trade opportunity because of the competitive target group that exists. Quantified Value of Mandrake as Acquisition Candidate With all the major areas of their competitive advantage put up together and with comparison of what the financial history has been for Mandrake for the last three years, the present value of the company could be give as indicated in the table. Last 2 years Last Year Present Value ASSETS: ?000's ?000's ?000's PROPERTY ,PLANT & EQUIPMENT 31 334 32 618 33 78 INTANGIBLE ASSETS 35 740 43 853 45 225 GOODWILL 34 605 43 051 46 254 OTHER ASSETS 11 884 11 162 12 554 113 562 130 684 CURRENT ASSETS: INVENTORY 70 818 73 149 75 325 ACCOUNTS RECEIVABLE 38 654 45 910 50 245 PREPAID EXPENSES 15 810 10 172 11 457 CASH 20 187 10 676 12 545 TOTAL ASSETS 259 032 270 592 LIABILITIES ACCOUNT PAYABLE 14 753 16 981 15 654 ACCRUED EXPENSES 21 955 18 810 20 245 TOTAL Current LIABILITIES 36 708 35 791 35 899 DEFERRED Taxes 13 795 11 654 12 244 PENSION OBLIGATION 9 256 9 080 10 211 SHAREHOLDER’S EQUITY 199 274 214 067 223 044 TOTAL LIABILITIES & EQUITY 259 032 270 592 281 398 The justification behind the current value of Mandrake is that the company’s growth has been quite slow of late and so it is not expected that the current values will be so high as compared to previous values. Possible synergies or other sources of value not reflected in Linton’s base case Merging with sports kits maker Through out Linton’s base case, it is not cited anywhere of his quest to merge with a sports kit maker. Rather, his present concerns have to do with the acquisition of a footwear company. As an alternative source of value, it is suggested that Active Gear merges with a sports kits maker who is into the production of sports kits other than footwear. This will make Active Gear who is into the production of footwear the automatic choice and stop point for customers of such a company who may want to purchase complete sports wear. Current studies has indeed showed that companies like Nike, Adidas and Puma have actually become global forces in their sports wear industry because clubs and customers who deal with them see these companies as one-stop sports companies where they can rely for all their kits. It is for this reason that Active Gear must merge with a sports kits maker to increase his market value. Clearly, a sporting club would be more comfortable if he comes to Active Gear and can purchase everything from jersey to pants to footwear to skin guards. Initial public offer Another medium of value creation and wealth creation has to do with the introduction of initial public offer. This may be a very crucial source of value especially as this would be the first major acquisition to be carried out by Linton. Through initial public offer, Linton will be putting himself in a position to amass a lot of capital from the public. This means that Linton would not have to bear the task of personally looking for funds to expand his company. Through initial public offer, Active Gear would also be putting its feet along the line of gaining internal expansion rather than bringing on board a new company. It would be noted that if Linton decides to bring on board a new company, the fortunes of the new company cannot be readily predicted. Using the infamous Enron case as a study, it could even be that there are issues within Mandrake that may not be known to Linton but would come out to affect his company negatively in the future. But with capital from an initial public offer, he would not have to introduce a new company but use the capital to be raised to develop his own company. REFERENCE LIST Bullen, M.L. 2007, Human resource accounting: A useful tool for measurement and management in organizations. Leadership and Organizational Management Journal. 85-103. Campbell, R., Owens-Jackson, L., & Robinson, D.. 2008, FAIR VALUE ACCOUNTING from theory to practice. Strategic Finance, 90(1), 31-37. 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The Unintended Consequences [Online] http://www.namb.org/government_affairs/fair_lending/GBAissuespredatorylendingwhitepaper.pdf [April 30, 2012] Read More