Acquisitions Result in the Shareholder - Assignment Example

MODULE Q a) Provide a review of the industry giving thought to the following: Continued outsourcing, In sourcing, or company acquisition. Please discuss the pros/cons of each of the above. Continued Outsourcing: Since MBM is a tier 2 aerospace company, it does not have enough share when it comes to suppliers. Because the local vendors are providing 85-90% of their product to the tier 1 companies (Goodrich aerospace, Bombardier aerospace, Messier-Dowty and Boeing aerospace). Because of these facts MBM has to face difficulties in doing their processes, and get their supplies from other vendors other than the local ones which increases MBMs costs. ADVANTAGES: 1. High Efficiency Since the work is outsourced to vendors who are specialists in their fields they provide more efficient end product than MBM would. The vendors have the necessary equipment and technical expertise for the proper and efficient production. Also, they will provide the supplies swiftly compared to MBM, if it starts manufacturing its own supplies. So the tasks outsourced by MBM can be completed at a faster rate and more efficiently. 2. More Concentration Outsourcing the tasks to vendors would allow MBM to concentrate more on its primary processes rather than the secondary ones, which will further strengthen its position. 3. Minimizing Risks By outsourcing its tasks to vendors, MBM can minimize the risks. Since it has vendors doing some of its work, responsibilities can be delegated. Also, the vendors, mentioned before, are experts in their particular job, hence their processes would involve less risk. 4. Reduced Costs By outsourcing, MBM can reduce its costs. Operating and recruitment costs can be minimized. DISADVANTAGES: 1. Exposition of data By outsourcing some of the MBMs confidential data might be exposed to the vendors. 2. Lack of customer focus An outsourced vendor works for more than one firm, so it can result in a lack of customer focus for MBM. In Sourcing: MBM can in source after building the processing facility, by doing so MBM can minimize costs such as transport costs etc. ADVANTAGES: 1. Control A primary advantage of in sourcing is increased organizational control. MBM can have more control on its processes. Which will result in high customer focus and more objective based processes. 2. Reduce Costs By in sourcing, MBM can minimize its costs. It will not have to incur transport and other related costs to outsourcing. DISADVANTAGES: 1. MBM will have to incur other costs such as research costs due to lack of resources and expertise. 2. Efficiency level of production can decrease. 3. By in sourcing MBMs concentration towards its core processes will decrease. Company Acquisition: MBM can acquire the vendors which will allow them to have a leading edge in the competition. ADVANTAGES: The total cost of MBM will decrease, as MBM will share resources and raw materials with the acquired vendors, and generate a lot of revenue. Acquisition of the vendors will cause diversification, which in turn can smoothen the earning results of MBM. DISADVANTAGES: Many acquisitions result in shareholder losses because when a company acquires a firm, it causes its liabilities to increase, which in return causes the shareholders equity to decrease. An acquisition can help MBMs revenues to increase and assist it in reaching its goals easily, however, it has the tendency of affecting or disrupting MBMs long term value, that is the shareholders equity. Q 2.a) Determine the annual costs for in sourcing product at MBM. Total annual costs for in sourcing: Title Cost ($) Building 2,500,000 Approvals & Certifications 500,000 Processing Equipment 1,500,000 Labor 324,000 Chemicals 1,800,000 Maintenance 72,000 Gas 54,000 Electricity 108,000 Drivers 90,000 Truck 45,000 Fuel 93,600 Total Costs 7,086,600 The table above shows the total annual costs for in sourcing. Details: MBM will have to construct a processing facilitys building for 2,500,000$, and get the certificates and its approvals for 500,000$. Also the processing equipment would be 1,500,000$. There is a total of 9 working labors, who work for 24 hours with 3 people working in one shift, that makes a total of 3 shifts. Since the organization operates for 300 days a year, multiplying this data we 324,000$ of labor costs per year. The chemicals that are required costs $250 per hour, as MBM operates for 24 hours a day and 300 days in an year, so we get 1,800,000$ chemical costs per year. There is one person responsible for maintaining, who works for 8 hours at a cost rate of $30 per hour, annually the maintenance costs would be 72,000$. Gas and electricity costs $7.5/hour and $15/hour respectively, 24 functioning hours in a day and 300 days in an year would incur a total cost of 162,000$. There are two drivers working 6 hours a day at the rate of $25/hour, also fuel costs are $.52/km (600 km per day), which makes a total of $90,000 drivers cost and $93,600 fuel costs. Also including the truck purchasing cost of 45,000$ (One time investment, included only in the first year), this cost is not necessary if MBM has bought it before in sourcing. Summing up all these costs make a total of 7,086,000$ annually. Q2. b) Assess MBM’s payback on the new Facility—In Years, how long before the facility is paid off. Assuming that Kikely has a payback requirement of 3 years on any capital investments, does the investment meet this objective. As mentioned in the case, MBM has a total sales of 17 million dollars annually. And the costs that are incurred if MBM constructs the new facility and start in sourcing the costs would 7.086 million dollars which results in a high profit rate. It would take an year for MBM to have its payback on the new facility. Yes, the investment is meeting its objective. MBMs gross profit has increased from 30% to 55-57%. Also, it is getting the payback for the investment in the capital in less than 3 years. Q 3) As opposed to building a chemical processing plant from scratch, if Kikely had the opportunity to purchase an existing chemical processing company for $6 Million dollars, with operating costs 30% less than those projected to be spent at MBM, should Kikely buy the company instead of constructing the new facility? Please provide your supporting information. Table below shows a comparison of annual costs of in sourcing and buying the company. In sourcing Buying new Company Title Cost ($) Title Cost ($) Building 2,500,000 Building 6,000,000 Approval & Certification 500,000 Processing Equipment 1,500,000 4,500,000 Labor 324,000 Total operating Cost 1,779,120 Chemicals 1,800,000 Maintenance 72,000 Gas 54,000 Electricity 108,000 Drivers 90,000 Fuel 93,600 Total Operating cost 2,541,600 Truck 45,000 Total Costs 7,086,600 Total Cost 7,779,120 If MBM purchases the company it will have to pay 6 million dollars. By purchasing the company its operating costs would decrease by 30%, which makes the operating costs be 1,779,120$. But when added both we found out that the total costs were more compared to in sourcing. There was a difference of (7,779,120-7,041,600) 737,520$. So, it would be better if MBM doesnt purchase the existing company, as it would result in more costs. Q4) In 2008, the government is lobbying to impose new environment regulations that, if passed, will results in $1 Million in increased annual costs in for all processing facilities. Assess how this annual expanse may change your assessment above (keep in mind that if you opt to not construct or buy a facility, processing suppliers will pass on 50% of the fee to you, as its primary customer. The question can be answered by two approaches since there is no clear clarification. 1. When the annual costs increases it will apply to in sourcing as well as buying the new company. In that case both the annual costs will increase by 1 million dollars, but the difference and the decision will remain the same. 2. However, if the increment only applies when the company is in sourcing then the difference might change, the in-sourcing annual costs will increase to 8,041,600$ and the other cost (that incur in the case of purchasing the company) remains 7,779,120$. The difference now is 262,480$. So, in this case it would be better to buy the company rather than investing in new capital, because purchasing the new company has a higher rate of return. Purchasing from suppliers can never be an option as the gross profit rate is low compared to in sourcing or buying the existing chemical company. Read More