Multinational Running And Study Of Spirent Communications - Essay Example

Multinational Running And Risk Management Study Of Spirent Communications 1.0 Introduction: Spirent Communications is one of the leading telecommunications and measurement firms, based in Sussex, United Kingdom. Spirent began as Goodliffe Electric Supplies which was later changed to Bowthorpe (Morning Star, 2014). The change in fortune of Bowthorpe came in with the dot com boom of 1990s (Morning Star, 2014). Spirent started expanding their business operations by acquiring and merging with various firms related to telecommunications and electronics industry. The name Spirent was adopted by the company in the year 2000 and continued its business expansion process with the help of acquisitions and alliances by taking over firms such as Caw Networks, Scientific Software Engineering, Fanfare Software and Imperfect Networks (Morning Star, 2014). The operational process of Spirent is categorized in two parts namely service assurance and performance analysis. The customer offerings of the company are mainly focused on the growth of providing effective test simulations and solutions in networking and communications process (Spirent Communications Plc, 2013). However, the financial performance of Spirent in the year 2013 was not significant in comparison to their performance of preceding years. The net revenue of Spirent was recorded at $472.4 million in the year 2012 which came down to $413.5 million in 2013 (Spirent Communications Plc, 2013). The operating profit of Spirent went down from $118.3 million in 2012 to $50.1 million in 2013 (Spirent Communications Plc, 2013).However, based on year performance comparison; Spirent noted that the performance of 2nd half of 2013 had improved by almost 17% from that of the first half (Spirent Communications Plc, 2013). Considering the financial up-downs, strategic and operational planning objectives of Spirent, the report will focus on analyzing the concerned company to evaluate their competitive position. 2.0 Business and Key markets study: The business performance of Spirent will be observed with the help of data gathered from the financial documents of the company. Beginning with the revenue, Spirent experienced a steep fall in its net revenue in the year 2013 as it decreased by almost 13% after reflecting a steady growth curve for the preceding 4 years since 2009 (Spirent, 2014). Figure 1: Revenue of Spirent Communications 2009-13 (Source: Spirent Communications Plc, 2013) It can be observed that the increase in the revenue of Spirent started to fall in the 2012 when the growth in revenue was measured as $472.4 million from $470.5 million in 2011 (Spirent Communications Plc, 2013). It can be noted that as the competition in the technology market is increasing in terms of services such as cloud computing, network securities and broadband services, Spirent is falling behind in the industry rankings. Out of $413.5 million revenue earned in 2013, the divisional focus reflected highest turnover ($213.4 million) from the Ethernet, test optimisation, cloud computing and wireless infrastructure followed by $167.7 million in wireless devices, wireless channel emulation and wireless service experiences (Spirent Communications Plc, 2013). However, all these divisions faced a critical short fall in performance in comparison to that of 2012. The technological market is growing and the growth is focused not only on the ability to innovate new products and services but also to ensure innovation of consumer friendly products and services (Duangploy, Bakay and Belk, 2010). Organisations such as Agilent Technologies Inc and Halma Plc have expanded their business activities concentrating on developing a diverse consumer offering process which cannot be said in case of Spirent (Spirent, 2014). Although, Spirent is engaged in business expansion but all their alliances, mergers and acquisitions have mainly focused on network development firms. 3.0 Co-operate and Financial Actions: In order to develop a competitive position in the industry, Spirent Communications started enhancing their business growth strategy by focusing on wider potentials of the internet and network industry (Nawaz and Hood, 2005). For instance, in 2009, the agreement with IneoQuest Technologies for improving video quality reflected a huge growth in client investment. Again, their tie-up with ServiceForce.com in 2009 helped them in developing a robotic mobile device operator which was much appreciated in the prevailing scenario of smart phone and tablet usage (McGowan Jr, and Moeller, 2009). The series of acquisitions, tie-ups and innovations of Spirent were mostly observed in the year 2009. The latest collaboration of Spirent was with EANTC in the year 2010 for improving the performance of Ethernet, MPLS and carrier (Graham, 1996). The financial activities of Spirent however are falling which can be because of their high organic investment for developing network securities or the weaker demand darting the second quarter of 2012. However, the focus of the top managerial authority still remains on the return on capital employed. 4.0 Financial Trends: The financial trend of Spirent Communications for the past 5 years has been analysed below: 4.1 Profitability: Figure 2: Net Profit Margin From the above graph, the net profit margin of Spirent prior to increasing from 2010 has experienced downfall in the period of 2008 to 2010. This reflects that although Spirent was able to bring back their profitability margin on a upward curve they are yet to achieve the benchmark set in the year 2008. 4.2 Investment: Figure 3: Return on Equity The return on equity graph of Spirent also reflects a falling trend since 2008 till 2010. The return on equity of the company fell sharply from $43.74 in 2008 to $19.43 in 2010. However, Spirent has managed to pull back since 2010 and have managed a steady growth in 2011 and 2012. 4.3 Liquidity: Figure 4: Quick Ratio The quick ratio indicates the liquidity of a company and its ability to pay of debts. In case of Spirent Communication, the graph reflects that the quick ratio of the company is increasing that implies the ability of Spirent to pay off its debts in the short-run. 4.4 Financial Gearing: Figure 5: Debt to Equity Ratio The ratio between the equity and debt balance of a firm can be reflected with the help of debt to equity ratio. The rising debt to equity ratio of Spirent Plc does not reflect a healthy scenario for the company. It means that Spirent is more dependent on debts rather than equity which that hamper the financial stability in future. 5.0 Risk Management: The risks considered in the following segment mainly focus on the political and exchange rate risks faced by Spirent Communications while operating in the international market place. 5.1 Exchange rate risk management: The headquarters of Spirent Communications is situated in Crawley (Wales) and in Sunnyvale (USA) meanwhile the major markets of the company are mainly restricted to Europe and North America (Spirent Communications Plc, 2013). From this it can be gathered that the operations of Spirent Communications is mainly focused on the values of dollar, euro and pound. In the words of (Géczy Minton and Schrand, 1997), exchange rate fluctuations can result in changes in the operational activities of a firm such as changes in the price of raw materials and production process. Considering this statement, it can be observed that fluctuations in dollar value will signify an unpleasant scenario for the business profitability of Spirent Communications. On the other hand, the subsidiaries of Spirent Communications are mostly based in the US and Asia Pacific region which also enhances the scope of facing exchange rate fluctuations in their business. As mentioned by Papaioannou (2006), planned ventures of a company are influenced by exchange rate fluctuations as the direct impact can be observed in the cash flow of a firm. In relation to the above given figures in the financial analysis of Spirent Communications, it has been noted that the business has suffered during the post global recession period. It is also important to understand that during the period of 2008-10, the international market was volatile and the exchange rate fluctuations had effected the growth of global economies which can precisely be the reason for the reduced profit margin and increased debt to equity ratio of Spirent Communications (Collier and Davis, 2010). Furthermore, it can be observed that growth in divisional business of a firm does not necessarily reflect the actual profit earned. For instance, Spirent Communications stated that the performance of the 2nd quarter of 2013 was better in comparison to that of the first quarter but their overall profit in year–on-year basis was lower than 2012. These types of affects are often results of exchange rate fluctuations and clearly can reduce or increase the earnings of a firm. Spirent communications however are more dependent on the expertise of the managerial bodies for resolving threats posed by exchange rate communications. Resources such as hedging and future contracts are included in the process of managing account exposure risks (Frenkel et al. 2005). Mainly because the profits earned by the company are being converted into the currency of the host country before the final development of financial calculations (Ullrich, 2009). This reduces the risk of Spirent Communications pertaining to exchange rate fluctuations. Also the fact that Spirent does not involve itself in non-operational currency deals reduces the effects of currency fluctuations on the business (Rayner, 2003). In order to reduce the influence of exchange rate fluctuations, Spirent Communications can utilise any three of the following options: Monitoring the exchange rates is the best process being utilised by business houses for managing currency fluctuations in their international business transactions (Carlson, Fisher and Giammarino, 2008). Considering the limited non-functional transactions on the part of Spirent this can be an effective process but cannot be implemented as a long-term process. The next process is to develop a future contract which will help the company in enhancing their benefits from exchange rate fluctuations considered the exposure estimates of the company are accurate. (Dhanani, 2000) However, the risks are also high in future contracts as wrong estimation can reduce the profitability of the firm. One of the most common processes utilised by firms for reducing the exposure from volatility is hedging. (Khalik, 2013) stated that hedging is one of the most efficient ways of observing the performance of the overseas performance of a company, however considering the complicacies involved in hedging process it can be considered quite risky to engage in. 5.1 Political Risk Management: Political influence in business is one of the primary factors for concern among the international corporate sector. According to (Kline, 2010), operating in the international market makes it mandatory for the companies to consider threats from the political factors of their host markets. Considering the trend of globalisation going viral among in the corporate industry, (Bansal and Dahlquist 2000) mentioned political threats are now being controlled with more exposure of the business houses in the economic development of a company. The political risks can be further explained by focusing on their types and nature: Firm Based: Political risks in terms of a firm not only relate to the civil situation of a nation but also depend on the judicial structure of the nation (Graybow, 2009). In order to reduce the impact of political changes in a nation, a firm must consider following the legal obligations. For instance change in the government structure, taxation process or the local rules relating to the operational process or employee management will hamper the organisational work process however keeping updated about these events and the legal system of the concerned nation will allow the company to adjust to these changes (Engel, 2010). In case of Spirent Communications they have registered themselves under the London Stock Exchange. Systems such as Employee Safety Act, Equality Act, etc are essential parts of the business management process of Spirent Communications. Also, developing a transparent business process with the help of accurate financial documentation and steady relationship with stakeholders such as Government and Media helps in reducing the impacts of political barriers for a firm (Moran, West and Martin, 1999). Country Based: Country based political effects are mostly based on the overall economy of the concerned nations. Multinational firms are often face problems in their market operations mainly because of the turbulence in the internal instability in the political scenario of the nation. On the other hand, the changes in the socio-cultural behaviour of the consumer groups can also be the result of political influence (Jensen, 2003). Wang et al. (2000) opined that changes in global concepts of geographical boundaries results in a direct change in the operational process, strategy and the earnings of a firm. For instance, the Euro zone is one of the primary markets of Spirent Communications and dividing the countries falling within Euro Zone can harm the profitability of the company. Other country based risks include changes in the internal policies regarding infrastructure and the growth plans of the firm (Bekaert, Harvey and Lundblad, 2005). Also the regulatory bodies of telecommunication industry of each market nation have a major influence on the operations of Spirent Communications. For instance changes in the telecommunication processes in Middle East countries have resulted in diminishing the client base of Spirent. Apart from this, in the American market also regular changes are being experienced in terms of taxation that can hamper the operational profit of the company. Global Risk Management: Operations in the international market place results in facing a diverse political scenario for a company (Graybow, 2009). Changes in international concepts and trends often lead to changes in the political structure of a country as observed in the case of Asian countries such as Bangladesh and Afghanistan. These factors can also reduce the market scope for Spirent by changing the rules of international business exchange of the concerned countries. This again brings in the subject of following the judicial system of the country as discussed in the firm based political risks. The changes in the legal structure may prevent a firm from operating within its geographical boundaries. Bekaert, Harvey and Lundblad (2005) reflected the criterion of corporate social responsibility of a firm to manage the political and legal threats faced by a company. According to Bekaert, Harvey and Lundblad (2005), corporate social responsibility enables a firm to contribute towards the economic, environmental and socio-cultural growth of the country reducing the barriers to operate in the market. The consideration of global rules and authoritative bodies such as WHO, European Union, IMF, etc should be maintained in order to ease the operational process of business houses in the international market place (Graybow, 2009). 6.0 Conclusion and Recommendations: Spirent Communications has established itself as a major brand in the global telecommunications industry. With a diversified division of consumer offerings, the company succeeded to expand business wings to multiple nations all over the world. However, the financial activities of the company reflect a slow growth since 2010. Spirent Communications experienced steep falls in their profitability and revenues during 2008-2010. international markets. The recommendations for Spirent Communications mainly focus on reducing their operational expenses to enhance the increase in the profitability ratio and the operating margin of the company. Another recommendation will be to consider hedging for reducing the exchange rate fluctuation impact in the global market place. Although hedging is a complicated process but it enhances the security of a company against exposure to volatility. Finally, in order to gain ease of access in operating in the international market place, Spirent Communications can start building good relationships with the governments and media houses of the nations and develop good brand equity for international operations. Table of Contents 2.0 Business and Key markets study: 2 3.0 Co-operate and Financial Actions: 3 4.0 Financial Trends: 4 4.1 Profitability: 4 4.2 Investment: 5 4.3 Liquidity: 6 4.4 Financial Gearing: 7 5.0 Risk Management: 7 5.1 Exchange rate risk management: 8 5.1 Political Risk Management: 10 Country Based: 11 6.0 Conclusion and Recommendations: 12 Table of Contents 14 Reference List: 15 Reference List: Accenture, 2013. Managing Political Risk Controlling Loss, Finding Opportunity. [online] Available at: [Accessed 28 November 2014]. Bansal, R. and Dahlquist, M., 2000. 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