International Running and Risk Management of Balfour Beatty Plc - Case Study Example

Contents Introduction 2 Balfour Beatty is a multinational service company that deals with infrastructure, construction services, infrastructure investments, and support services (Ruth, 1984). This is the largest construction contractor in the United Kingdom. 2 Financial trends 4 Exchange rate risk management 8 Political Risk Management 10 Conclusion and Recommendations 12 Reference List 13 Introduction Balfour Beatty is a multinational service company that deals with infrastructure, construction services, infrastructure investments, and support services (Ruth, 1984). This is the largest construction contractor in the United Kingdom. Size Balfour Beatty was created in 1909 with an initial capital of £4,410,000 which was a lot of money then. George Balfour teamed up with Andrew Beatty an accountant to form this large enterprise. Balfour Beatty carries out four business operations which include: Industry Infrastructure investment involves participating in building of schools, hospitals, and road and street lighting as one of the business operations. Construction services involve building, designing, mechanical and electrical services, ground and rail engineering as part of the operations. Other business operations are professional services that involve project management, project design, architectural services, and planning consultation. As the final business operation, support services involve facilitating facility management and business outsourcing. Market share The company has good establishment in the UK, Hong Kong, USA, and United Arab Emirates. Its geographical market varies with UK being the largest market share followed USA, Hong Kong and finally UAE. Raw materials The company acquires most of its raw materials from recycling raw materials. This enables it to save up to £54 million and reduce wastage while processing the raw materials into the final product. Turnover The rate of turnover in the company increased with each year from 2008 where it was at its lowest and 2012 being its highest with a percentage increase of 14%. Market report The company has good establishment in the UK, Hong Kong, USA, and United Arab Emirates. The company’s competitive advantage originates from strong local business commitment, local communities and staying close to clients. Market share, financial actions and competitive advantage Balfour Beatty has established itself as a multinational company offering its services to various countries around the globe. The company has good establishment in the UK, Hong Kong, USA, and United Arab Emirates. Its geographical market varies with UK being the largest market share followed USA, Hong Kong and finally UAE. Other targeted markets include Australia and New Zealand, Canada, South Africa, India, and Brazil. Cooperate and financial actions Competitive advantage The company’s competitive advantage originates from strong local business commitment, local communities and staying close to clients. The company’s strength comes from offering professional services to its clients. Most developing countries such as Asia, Australia, Africa and the Middle East provide a large market for the company. The company expects a growth rate of 3.5- 4.0% in established countries. Geographical strengths Based in the U.K, the organization is able to capture the whole European market. Over the past years, the company has augmented its geographical coverage symbolizing great competitive advantage. Its multinational nature provides it with a large geographical coverage that provides additional market. The nature of the work that involves construction enables it to interact with many regions hence promoting the company. Financial strengths and implications It is one of the largest global infrastructure companies that continue to absorb other companies, which put the organization at the top. Based on global forecast the company intends to spend £20 trillion between 2010 and 2020 (BBC News, 2009). Compared to other global engineering companies, Balfour Beatty has more infrastructures, and it is among the top players in United States. As more countries develop the company’s market continues to develop, and by 2025, they are projected to account for the majority of worldwide investments in infrastructure (Plunkett, 2009). The company focuses its financial actions in buying other companies hence increasing its market around the globe. Balfour Beatty acquired a series of other construction companies, for example, Mansell plc for £42 million a construction service company in 2003Birse plc a construction and Civils contractor at £32 million in 2006, and Centex Construction at £180 million in 2007(Bill, 2008). In 2009, the company bought Parsons Brinckerhoff, a United States project management firm, for 626 million dollars (Hoskins, 2007). In 2010, Balfour Beatty bought two companies Halsall Group a Canadian services firm at £33 million, and United Kingdom Rok plc Construction Company at £7 million. Financial trends In this section, the financial trends of Balfour Beatty will be analyzed in terms of gross profit, Net Profit Margin, current ratio, investment and financial gearing Year 2012 2011 2010 2009 2008 Sales (£m) 8656 9494 9236 8954 8261 Cost of sales (£m) 7667 8358 8132 8173 7628 Gross profit (£m) 989 1136 1104 781 633 Gross Profit Margin 11.43% 11.97% 11.95% 8.72% 7.66% Net Profit (£m) 35 186 143 213 196 Net Profit Margin 0.40% 1.96% 1.55% 2.38% 2.37% Current Assets (£m) 2594 2755 2469 2576 2166 Current Liabilities (£m) 3263 3401 3094 3070 2809 Current Ratio 0.79 0.81 0.80 0.84 0.77 Total long-term debt (£m) 478 426 380 340 241 Equity (£m) 1306 1259 1156 995 861 Long-term debt/ Equity ratio 0.37 0.34 0.33 0.34 0.28 Source: Adopted from the annual report 2008-12 Profitability Gross profit margin Analysis of the gross profit margin From the data availed in the table above and graphical representation, there has been an increase in company’s gross profit. The gross profit rose steadily from year 2008 to 2010. However, in 2011/2010 financial year, gross profit fell by 0.54%. The constant rise in gross profit is as a result of reduced cost of sales, but in 2012 the cost of goods sold rose leading to decrease in gross profits. Net profit margin Analysis of net profit Balfour Beatty displays a general decreasing profit margin. Year 2012 displays a very narrow profit margin compared to the rest of the years. Before that 2009 had the largest profit margin due to less volatility of earnings. In 2010 net profit decreased as cost of sales increased and slightly rose in 2011. Net profit decreases due to increase in cost of sales that reduce profit for the company. Liquidity Current ratio Analysis of the current ratio This refers to the ratio between current assets and current liabilities. The current ratio of the organization rose from 2008 to 2009. This was as a result of a slight proliferation in the current assets and reduction in current liabilities compared to the previous years. The ratio fell in 2010 as the current liabilities increased, later rose in 2011. Finally, in 2012 the ratio fell to o.79% due to a decrease in current assets. Financial gearing Long-term debt/Equity ratio Analysis of financial gearing A steady increase in equity ratio reveals itself from 2010 to 2012. This occurs as a consequence of an increase in debt balance or a decrease in equity balance. In this case, Balfour Beatty increases its long term debt hence an increase in equity ratio. The decrease between 2008 and 2008 occurred due to decrease in the debt ratio. Investment Dividends payout ratio Source: Global Business Browser (2014) Analysis of investment The dividend ratio has risen from 2008 to 2012. However, a slight decrease was monitored in 2010/2011. The increase of dividend payout ratio is as a result of future expectation of low returns for the organization among investors, hence making them additional investments now. Risk Management. Being a multinational company Balfour Beatty faces several risks some of which are inevitable (Moffet, 2011/2012. Some of these risks include exchange rate risks, political and country risks which are not easy for the company to control (Russ, 2007). The risk poses threats to the organization and its future if not managed. As a result, the company has developed ways to overcome and handle these risks. Exchange rate risk management As the company extends its geographical coverage around the globe, it is affected by the different exchange rates (Plunkett, 2013). The shift of construction workload from United Kingdom to the United States led to the negative impact on the company due to 10% fall in the value of the dollar. With the downturn of the economy, unfavorable exchange rates have hit the market leading to the high cost of production, withdrawal of consumers due to low funding, and complications in transaction payments overseas. As Australia’s economy continues weakening, Balfour Beatty is set to undergo a loss of £10 million for its professional services. Businesses developing in the new markets like South America and Asia Countries, for these countries, the international settlement currency is US dollar, but the US dollar against pound rate fluctuated around 10% in 2012 (Financial Times, 2012). According to the Financial Times (2012), currency rates of Euro against Sterling from lowest 0.776 to highest 0.849, the exchange rate changed to 9.4%. For these countries, financial systems are not stable and do not have strongly risks resistance, which also may cause a significant loss because of the exchange rate (Barisikand Tay, 2010). Balfour Beatty has come up with a four step process to deal with risks; identification, analysis and evaluation, mitigation, reporting and monitoring. Identification involves identifying the business objectives and identifying the risks involved with project both financial and non-financial (Frenkel, 2005). The second step involves analyzing the risk identifying the degree of influence on the organization and its likelihood. Third step involves mitigation; actions plans developed and implemented to handle the risk. The last step involves monitoring of the mitigation plans implemented to see how effective they are to the organization. With the global nature of the multinational company, it more likely to be hit by exchange rate risks with respect to transactions in those foreign countries. Also, the translations of the net assets in the financial statements of foreign subsidiaries get affected. The impact of exchange rate as a risk to the company may have varying impacts on it depending on the rate itself in the different countries. Exchange rate affects company profits. However, Balfour Beatty came up with mitigation ways to handle the risk. Through knowledge about foreign currency, the company can manage by entering into forward foreign exchange contracts (Rayner, 2003). A currency forward is a binding contract that blocks the effect of exchange rate in purchases, and sales in international trade (Financial Times, 2013). It is of hedging technique known as financial-hedging that requires no payment, (Treanor, 2009). The other advantage of currency forward control method is that it can be modified to a certain amount and delivery period (Gandolfo, 2007). When forward contracts lock exchange rates the future price of a product gets protected. It is a good tool to shield earnings and cash flow (Logue, 2007). Knowledge about future exchange rates is the most significant thing while using this tool. However, this could also be a great disadvantage to the company in case the exchange rates favor great purchasing and sales prices (Koziol, 1990). If actual exchange rate is inconsistent with the expectation, the company may lose the income they deserve. A forward contract can only be terminated by the two parties involved. Natural hedging is also a hedging method (Khalik, 2013) used to manage the degree of impact exchange rates have on an organization. Based on the foreign subsidiaries in other countries, natural hedging of income, cost, and prices can reduce the exchange rate rise (Financial time, 2007). Natural hedging can also reduce risks on rising costs. Therefore, Balfour Beatty can predict the exchange rate by the alteration of interest rate in addition to inflation. At the same time, they use money market hedge, options market hedge and other financial derivatives to reduce exchange rate risk. The company’s overall trading transactions are as per their expectation; therefore, it defines the risk management process to be effective. Financial statement for the year 2013 indicates an increase in the company profitability. Political Risk Management The simplest way for an organization to face political risks is to find profound, simple, and effective political risk management by dividing the risk into political/ country, and global (Kobrin, 1982). Political Risk Management Being a multinational organization, Balfour Beatty is bound to encounter political risks, which the company cannot control. Prevention is the best technique to deal with political risks in the company. Balfour Beatty employs risk assessors to identify the various political challenges within the organization’s potential market territory. Identification of the risks allows the company to determine whether it can handle the business in the region or not. The organization complies with all recognized boycotts (a country prevents other countries from doing business with a specified country), and sanctions as imposed by various nations. For example, the US government prohibits any business relationships with terrorist countries and drug traffickers. With sanctions, the organization avoids breaching any prohibited dealings within the host country. Political risks vary with different countries; variance is determined through the rate at which they emerge and the degree of impact. Balfour Beatty uses political risk registers to record the various challenges faced in respective nations, and monitoring those challenges. Report structures monitor risks, update and provide mitigation recommendations for risks identified. Country Based The company aims at following the laws, stated by the country, to prevent any illegal cases that may arise. The most important rule companies’ break is one against corruption. Balfour Beatty aims at carrying out legal business activities, by eliminating corruption from its transactions. Balfour Beatty takes great precaution when dealing with competitors by carrying out legal and healthy competition practices. The company creates an open forum in which the public can report on cases of misconduct or breaking of laws. Inside information must not be used for self-gain. It is a serious offence to buy or sell stock based on inside information; the same also applies to shares. By following government terms of taxation, and abiding to the rules is another political risk management tactic used at the company. This prevents creating a bad reputation for the company hence assisting it in maintaining its rapport to the public. Global risk management As a multinational company, the organization deals with several countries and governments hence a number of laws need to be studied (Moran, 2005). Balfour Beatty studies and implements foreign rules while conducting foreign business. It also abides to the laws of a certain country when carrying out construction activities in foreign nations (Moran, 2004). The company has set policies to protect the environment clean and hazardous free. In 2008, the company set a Zero Harm goal, no harm across all businesses by year 2012. Less political risk is involved through eliminating factors that may lead to breaking the laws of the country. The company reduces political risk by familiarizing with the locals in a certain region. Respecting local culture and traditional customs also assist in reducing political conflict (Gatto, 2011). In some nations such as the Middle East women are not allowed to work. Getting to know some of the locals, aids in communication and dealing with any differences or riots that may come up. Conclusion and Recommendations From the above analysis of the certain risks Balfour Beatty is exposed to, the risk management procedures sustain and protect the organization from harm. Sticking to the exchange rate identification, analysis, and mitigation assists in ensuring that the organization is shielded from exchange rate risk. More to that, they should be able to predict what they expect while handling exchange rates (Ullrich, 2009) negotiating financial transactions with host countries, and finally diversifying the risk by local sourcing and acquiring loans from local banks (Tatnall, 2010). Working locally while working in a different country enables the organization to adapt easily. The company should also maintain its local interactions while in foreign countries, avoid racial discrimination or gender. To enhance political risk management, it would also be appropriate to support and embrace different cultures. The organization can employ people from different places to join and work in unison. Additionally, it is indispensable for the company to be cognizant of the laws that govern a certain company and customs that guide a certain community (Moran, 1999). Through direct involvement and relations with local people in subsidiaries will assist in understanding the laws and regulations. All this recommendations shall assist in building a greater company. Balfour Beatty is a company that continues to extend its coverage year by year, and it requires this to prosper. Reference List Hoskins, Paul (17 September 2009). "Britains Balfour Beatty unveils $626 mln U.S. buy". Uk.reuters.com. Retrieved 17 April 2011 Bill, Tom (19 March 2008). "Balfour Beatty buys Dean & Dyball for £45m". Building.co.uk. Retrieved 17 April 2011. Financial Times.(2007) Natural Hedge.Financial Times.25 Jan, P2. 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