Laird Plc a Public Owned British Multinational Company - Essay Example

Laird Plc a public owned British multinational company Introduction Laird Plc is a public owned British multinational company, whose operations are focused on providing electronic and technological products and services to the customers worldwide. It was established in 1824 and headquartered in London (Laird, 2014a). The company is registered under London Stock Exchange and employs around 9,000 employees who operate in Asia, Europe and North America (Laird, 2014a). It delivers its products and services to nineteen countries, which includes Japan, China, India, Mexico, Singapore and many more. The company provides complete solutions to protect the electronic devices of the users from any potential harmful Electromagnetic Interference (EMI) and also safeguard from heat that are generated during the operation of device (Laird, 2014a; Laird, 2014d). The company leads in developing, designing and delivering innovative technologies that ensures organisations, applications and people to stay connected effectively. Laird owns two divisions: Wireless Systems and Performance Materials. The products of Performance Material are distributed to wide markets that include Information Technology and telecom, smart phones, transportation and medical (Laird, 2014c). In this report, the international operation of the company along with competitiveness is examined by performing market and financial analysis. However, risk associated with the company operations are also studied in order to understand the manner it combats against exchange rate, country and political risks. Business and key market study The following figure highlights the financial performance of the two main divisions of Laird Plc. The financial performance is evaluated based on the revenue of the divisions over the period 2010- 2013. Figure 1: Financial performance of two divisions (Source: Author’s creation) From the figure, it can be stated that the majority of the revenue during the four years in Laird Plc is generated from Performance Materials. This division accounts for more than half of total revenue that are incurred by the group as a whole. It is observed that the revenue from Performance material division have increased over the years due to the increase in demand for thermal management solutions, shielding materials for electromagnetic interference (EMI) and signal integrity products (SIP) (Laird, 2014c). Despite the growing revenue, the company is encountering challenge because of the highly integrated circuits related to thinner and smaller devices, which are becoming more innovative so as to protect the package devices (Laird, 2014c). Cooperate and financial actions Laird Plc has undertaken many developmental programs, which have made it one of the well-known electronics and hardware providers in the world. Its global operations help in catering the needs of the diverse section of the society. The company gives emphasis on innovation; thus it aims at investing 28% of the income in Research and Development (R&D) activities every year (Laird. 2014c). This indicates the fact that Laird Plc not only serves as the best electronic service provider but it also aims to become the leader by expanding its product base and entering new markets worldwide. The company has undertaken many merger and acquisition activities to expand its market share over the years (Laird, 2014b). Most recently in 2010, Laird Plc acquired Cattron that aims at manufacturing automation equipments and wireless controls. During 2013, the company also acquired Kluver that manufacture cooling system for the medical equipments. Nevertheless, the company also took over leading microwave absorber equipment producers known as Microwaves Materials Group. Moreover, it increased its strength in M2M wireless communication market by acquiring Summit Data Communications (Laird, 2014b). These acquisitions increased the revenue of the company to a great extent and also contributed in expanding its profit base over the years. Financial trends of Laird Plc In this section, the financial trends of Laird Plc will be analyzed in terms of profitability, liquidity, investment and financial gearing: Profitability Figure 4: Net profit margin Source: Global Business Browser (2014) The net profit margin of Laird Plc has fluctuated over the years. During the past five years, it has improved to a great extent from negative to positive figures because of the increase in demand for the products. Nevertheless, according to the graph provided above, the profit margin during 2013 is less as compared to 2012 due to increase in competitiveness in the market. Figure 5: Return on capital employed (ROCE) Source: Global Business Browser (2014) As per the figure provided above it is evident that Laird Plc failed to utilise its capital effectively during the phase 2009-2010 which led to negative ROCE. This is directly reflected on the net profit margin of the company which is observed to be negative in Figure 4. Hence, right utilisation of capital is significant for success of a company that is reflected during the later phase from 2011-2013. During this period, the ROCE improved to a great extent and the trend continued till 2013, which is indicative of the fact that Laird Plc have utilised its resources very well in order to earn profit. Liquidity Figure 6: Current ratio Source: Global Business Browser (2014) Laird Plc uses raw materials to manufacture its products and services; hence this are obtained from the suppliers, who provides credit to the company. It is observed Laird Plc have tried to improve its liquidity position from 2009-2012; however, it declined in 2013. Despite the improvement in the ratio, the ratio is below 2 during 2013, this ascertains that the company has encountered difficulty on meeting its current obligations. Hence, from the graph provided above, it can be stated that the liquidity position of Laird Plc is weak during the period. Leverage Figure 7: Debt to equity ratio Source: Global Business Browser (2014) It is observed that Laird Plc has strategized its financing policy conservatively; this is obtained from the lower values of debt to equity ratio. The maximum debt financing is noticed in 2011, which implies that Laird during this phase gave emphasis on debt financing rather than equity. This is an aggressive decision for the company; nevertheless, it improved it in 2012-2013. The main effect on the company is that it has to bear the burden of debt and pay the interest on quarterly basis; this drains out the liquid asset fast, which influences its liquidity position. Efficiency Figure 8: Asset turnover Source: Global Business Browser (2014) The asset turnover ratio of Laird Plc is not adequate enough to portray that the sufficient sales have been generated out of the owned assets of the company, as the value is not high. Though the company has tried to improve the asset turnover ratio over the years; but, because of its higher debt obligations, the liquid assets are drained out and it cannot be used for generating increased sales. Investment Figure 9: Dividend per share Source: Global Business Browser (2014) The figure shows the fact that Laird Plc has provided higher dividend per share to the shareholders and the amount has increased over the years from 2009 to 2013. The main benefit of higher dividend is that the company will attract more shareholders, which will add up to its source of finance. Figure 10: Earnings per share Source: Global Business Browser (2014) The earnings per share of Laird Plc also reflect the fact that the company has given emphasis on satisfying its shareholders by increasing its EPS value over the years. The main advantage of higher EPS is that more shareholders are attracted towards the company for investment. Risk Management Laird Plc is a multinational company and thus it has to encounter several risks, some of them are unavoidable due to its nature. This risk includes country, political and exchange rate risks, which are not at all easy for the companies to control. As a result, it is important for the companies to manage these risks so that it can sustain successfully in the long run (Menon, 2005). Exchange rate risk management Laird Plc has extended its geographical coverage over the globe through acquisition of different companies. Hence, its operation is affected by fluctuations in exchange rate. It is observed that the change in exchange rate have the potential to bring in potential loss or gain to a company (Choi and Prasad, 1995). The home company encounters loss, when the local currency depreciates with respect that of host country. This change in exchange rate affects the business of the home country to a great extent. Due to the fluctuations in value of currencies in different countries, the present value of future cash flow is subject to decline; this is mainly because of the import and export sales (Bartov, Bodnar and Kaul 1996; Bodnar, et al., 1995; Froot and Thaler, 1990). Laird Plc operates in more than nineteen countries such as Mexico, Japan, Singapore, China, India and many more. Due to decline in economic condition, Laird Plc has to encounter unfavourable exchange rates which have led to increase in cost of production and decrease in customer base due to low funding and complex payment structures. The local currency exposures of the company are balanced whenever required. Nevertheless, the Group is exposed to several currency imbalances which add up to the procurement and operating costs of the products. Moreover, it does not also match with the revenues that are generated by the company after converting it into local currencies (Laird, 2013). According to the recent financial announcement of the company, 75% of the revenue is generated in US dollars; whereas 40% is utilised as cost and hence large portion of US dollars are earned by the company as surplus. Moreover, 10% of the sales revenue is collected in Renminbi (RMB) and Euro (EU) (Laird, 2013). Other than RMB and EU, in majority of the currencies, the revenue is less than the cost. RMB accounts for about 40% of the cost of the company; hence the imbalance has affected the company adversely as strength of the currency could not be recovered fully from the selling price in US dollars. Additionally, translational impact is observed in converting the profit into reporting currency of the Group, i.e. sterling. Due to appreciation of US dollar by 0.01 against sterling, the operating profit of 2011 has increased by £ 0.8 million. Nonetheless, during 2012, US dollar was stronger than sterling as compared to 2011 and this was reflected in the translation profit as it differed by £0.8 million (Laird, 2013). Exchange rate issues are severe to any company if it is not mitigated properly. Majority of the firms are interested in using Value at Risk method for gauging risk in an investment (Dhanani, 2000; Goldberg and Tritschler, 1995; Ullrich, 2009). The evaluation is based on the three parameters: holding period of the foreign exchange, level of confidence, which is estimated and lastly, currency in which the whole transaction is denominated. Risks are basically managed through hedging (Makar and Huffman, 1997; Phillips, 1995). Laird Plc has also devised strategies in order to minimize the effect of currency fluctuations on its operation (Laird, 2013). It has tried to match the local currency cost with that of the income. It has used forward contract for hedging against the risk of losing money due to exchange arte exposure. About 75%of the cash flow that are not matched with the cost is covered through forward contract on quarterly basis. The borrowing of the foreign currency are utilised for hedging the cash flow and principle asset of the company (Laird, 2013). Political risk management Political risks form a vital part of operation especially for companies like Laird Plc, which operates in several countries. The simplest method of encountering political risk by the company is to divide it into three divisions: firm based, global and country based (Kobrin, 1982). Firm based Laird Plc is a multinational corporation; as a result it has to encounter severe political risk which cannot be controlled. However, it can be managed through a number of ways. It basically follows the Global code of Conduct that is applicable for its business activities and subsidiaries (Laird, 2014e). The employees have to comply with the rules and regulations that are depicted as the code of conduct of the company; it also defines the ethical practices of Laird Plc. This regulation assists in dealing with the foreign political laws. The law of different countries are separate; thus Laird has instructed the employees to follow the local laws and work accordingly (Wang, et al., 2000). It also encourages their employees to show respect to the local culture and avoid dispute. Laird obeys the laws related to the export, customs, trade control and applicable license requirements. The company selects workers from different host countries without discriminating the labour laws (Rajwani, 2011; Moran, 2014; Han, et al, 2007). Country based Laird Plc obeys the laws stated by the country in order to prevent illegal cases. Corruption is one of the most important country based risk that can affect the company operation severely. In order to avoid this risk, the company adopts Global Code of Conduct that helps in maintaining and considering all the legal business activities especially after eradicating any type of corruption from international transactions. The high density of unskilled labour in the host country is a severe challenge to the company. In order to make them appropriate for the company, it will train them according to the rules and policies (Papaioannou, 2006). In North African and Middle East countries, the rate of unemployment is high; moreover, there is high inflation rate which has encouraged corruption in the internal management systems of the companies. As a result of this political unrest companies prefer to outsource their operations from other countries. However, this outsourcing is also accompanied by several risks that are severe for the company (Rapoza, 2013). Global risk Management Being a multinational company, Laird has to deal with a number of laws of the country and its governments. Hence, the company studies the foreign laws and government operation very minutely before entering into any acquisition programs. It is significant for them to abide by the rules of the foreign nations while conducting the business peaceful. It is necessary to show respect to the culture of the foreign country and do not violate their rules and regulations so as to attract the attention of the population (Low and Shi, 2001). If the general public become aware regarding the good ethics followed by the company, then the sales will increase in the foreign country. The same strategy is followed by Laird Plc so that it can attract customers in international grounds (Nawaz and Hood, 2005). Conclusion and recommendation Laird Plc has undertaken many acquisition programs to expand its business internationally. Through massive acquisition activities it has reduced the cost of production to a great extent and is successful in becoming the best player in the technology manufacturing business. As it operates in a number of countries, thus its business is subject to several risks attached to exchange rate fluctuations and political problems, which are quite evident in every country across the world. Majority of exchange rate risk is encountered by the company due to the increasing operating as the US dollar is appreciating. However, the operating profit is affected during 2012 as the company is benefitted from the exchange rate fluctuations. Hence, it can be stated that the exchange rate exposure can even bring profit to the company. Laird Plc is also subject to political risk and in order to manage it, the company aims at following stringent rules and regulations. After analysing the major areas of risk of Laird Plc, it can be recommended that it should choose the host countries based on its nature of exchange rate fluctuations. Stable exchange is favourable for the business and it also indicates that it is a healthy nation. Moreover, the company should also examine the political condition of the host country as it has the ability to affect the business to a great extent. Reference List Bartov, E., G. Bodnar, M. and Kaul A., 1996. Exchange Rate Variability and the Riskiness of U.S. Multinational Firms: Evidence from the breakdown of the Bretton Woods System. 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