The Important Markets of Laird Plc - Research Proposal Example

International operations and risk management of Laird plc Table of Contents Introduction 3 Business and key markets 3 Corporate and financial actions 5 Financial trends 5 Sales and growth 6 Gross profit margin 6 Net profit margin 7 Liquidity 7 Current ratio 7 Efficiency 8 Asset turnover 8 Dividend ratio 8 Risk management 9 Exchange rate risk management 9 Political risk management 10 Firm based 10 Country based 11 Global risk management 12 Conclusions and recommendation 12 Reference list 13 Introduction Laird plc is a global electronics and technology company with its headquarters located in 19 different nations. The primary aim of the company is to provide technology solutions which protect electronic devices. The company remains dedicated towards providing integrated providing technology solutions which not only comply with organizational needs but also the environment. To remain dedicated towards innovation and delivering fast solutions are the prime motives of the organization. Laird plc gives high importance to its customer base and ensures that all its actions provide maximum satisfaction to consumer needs. Through investing in advanced technology, the firm is seen to frequently launch new products which facilities it to increase its existing consumer base. Laird plc is considered to be one of the superior technology firms operating in the U.K. Since the recent recession has impacted the overall economy of the U.K, revenue from the parent nation market had declined considerably. The condition was similar for all firms operating in the technology industry. However the Laird has been successful at emerging as a strong technology solutions firm in the developing nation of Asia, which has provided considerable impetus to its overall growth (Laird plc, 2013). Business and key markets Being a global technology firm, Laird plc is seen to operate in a number of nations. The key markets of the firm and the revenue generated from them are depicted in the following table. 　 2009 2010 2011 2012 2013 Asia - - 45.00% 47.00% 48.00% North America - - 36.00% 36.00% 35.00% Other Europe - - 16.00% 14.00% 14.00% UK - - 2.00% 2.00% 2.00% RoW - - 1.00% 1.00% 1.00% (Sources: Laird plc, 2013) Asia is seen to be one of the important markets of Laird plc, in terms of revenue generation (Laird plc, 2013). The firm has remained successful in maintaining its revenue level in other markets as well. In terms of market segment the company’s performance is analysed as follows. Figure 2: Performance Materials segment (Source- Laird plc, 2013) In the performance materials segment the company is seen to achieve high growth through the sale of IT and telecomm solutions and devices. Similarly, from the figure below it can be seen that in the Wireless Systems segment, maximum revenue and growth has been achieved through the sales of transportation solution and devices (Laird plc, 2013). Figure 3: Wireless Systems segment (Source - Laird plc, 2013) The company has been seen to increase its investments in research and development activities so as to develop a stronger platform and scope for increasing market strength. A significant contributor towards market growth is the investments made by the company in developing new products (Laird plc, 2013). Corporate and financial actions The annual reports of the firm reveal that revenue obtained from the Performance Materials segment (£342 million) were comparatively higher than the Wireless Systems segment (£194 million) for the year 2013. Additionally, it was also seen that the assets and investment position of the company had remarkably enhanced due to acquisition of Nextreme. Under the efficient leadership of David Lockwood, the company had determined to enhance its overall revenue and financial position by strengthening its market hold. Revenue of the firm had notably enhanced in the latter half of 2013. This was mainly due to enhancement in market demand for electronic devices and integrated solutions (Parker, 2003). Laird plc is seen to operate with the prime motive of enhancing returns available to shareholders. The company has remained successful in achieving this objective to a very large extend as the annual reports of the company reveal that dividend for the year 2013 has remained higher than the year 2012 (12.0p in 2013 and 10.0p in 2012). Financial trends The figure below shows the financial results of Liar plc for the past 5 years. Accordingly analysis has been conducted in respect of the company’s liquidity, profitability and efficiency position. 　 2009 2010 2011 2012 2013 Sales £m 528.8 567.4 491.3 520.2 537.0 Growth -16.76% 7.30% 3.28% 5.88% 3.23% Gross margin 28.01% 31.02% 34.85% 37.39% 38.29% Net profit £m -3.5 -16.0 -119.0 46.5 30.8 Net profit margin -0.66% -2.82% -24.22% 8.94% 5.74% Current ratio 1.8 1.8 2.0 2.2 1.4 Asset turnover 0.56 0.61 0.53 0.61 0.65 Dividend per share n.a. 0.1 n.a. 0.1 0.1 Sales and growth In order to incur high financial stability and profits, it becomes essential for Laird plc to earn adequate revenues (Heaton, 2002). Hence, sales volume has a significant impact upon the profits and financial position of the organization (Cornett and Saunders, 2003). Profitability Gross profit margin The gross profit margin indicates whether the net revenues earned by the firm are adequate for meeting all production related expenses. A high gross profit is considered favourable as it provides meeting operational and administrative expenses. Laird plc’s gross profit position is seen to be quite satisfactory (Brigham and Houston, 2011). Net profit margin Net profit margin indicates the excess profits available to pay off interests, taxes and dividends after meeting all operation and administrative expenses. The net profit position of the company is seen to be quite high due to optimized operational strategies (Van Horne and Wachowicz, 2008). Liquidity Current ratio Current ratio specifies a firm’s ability to meet short term debts. Laird plc is seen to be having a comparatively weak current ratio position due to increased levels of investments in research and development of new products which raised the debt levels sufficiently (Vanhorne, 2000). Efficiency Asset turnover The asset turnover position of a firm determines its ability to generate profits from the use of existing assets. The efficient management system of the company ensures maximum efficiency so that the financial goals can be met (Marchica and Mura, 2010). Dividend ratio Since, the primary goal of Laird plc is to maximize shareholders revenue, maintaining a high dividend per share ratio is essential. Laird plc in general is seen to have a high level of dividend per share. This is due to the fact that the company in the last few years has been able to expand its revenue base adequately (McMenamin, 2002). Risk management Being an international business firm, Laird plc is likely to face certain types of risks in its course of operations. It is essential for the organization to manage its risk related factors efficiently so that profits can be maximized. In the current section, efforts have been given towards understanding the crucial risks which impact Laird plc’s operations and the strategic measures taken for mitigating risk impacts upon the business (Allayannis, Ihrig and Weston, 2001). Exchange rate risk management Exchange rate risks can be commonly defined to be the fluctuation in the rate of exchange of any nation. Due to such changes the expected revenues might not be realized and the firm may incur potential losses (Burnside, Eichenbaum and Rebelo, 2001). Exchange rate risks are seen to adequately depend upon the volatility of the currency due to the existence of inflation and instability in the economic systems. If the fluctuations in the exchange rate are positive, it is considered advantageous as the firm is in a position to obtain higher profits. Due to the recent economic downfall, and its severe impact upon the economy of the U.K had considerably reduced the value of pound in respect of the U.S dollar (Berkowitz, 2001). Laird plc also operates in a number of developing nations such as South Africa, India and Korea, which had also suffered a loss of revenue due to exchange rate fluctuations. Such nations are seen to obtain settlements of their international activities in U.S dollars. Since Laird plc ultimately receives payments in pounds, the overall revenue has fallen due to the declined exchange rate. The currency exposed risks faced by the firm is mitigated by the firm using strategic techniques where the local costs are matched with the currency income. Additionally, a number of risk mitigation instruments are used by the firm to remove the scope of incurring losses due to such risks (Andersen, et al., 2001). In respect of exchange rates, Laird plc is exposed to three important types of risks. These are essentially, transaction risks, translation risks and economic risks. Transaction risks arise when the company is required to make or obtain payments in foreign currency. This type of risks may last for a short to medium time period. Such risks impact the cash flows of a firm and the excess cash reserves (Sarno, 2005). For Laird plc, such transactional risks are seen to mainly arise from the developing markets where economic stability is low. However emerging nations also provide the scope of end-to-end trade systems which facilitate mitigating transactional risks to a large extend (Dominguez and Tesar, 2006). Understanding the local market becomes essential for reducing such risks in the global trade environment. Translational risks mainly arise when the financial statements of the company’s subsidiaries are converted into the parent nations currency values (Christoffersen and Diebold, 2000). This type of risk may last for medium to long term. The exchange rate movements of the foreign subsidiaries get infiltrated into the consolidated financial statements. Translation risks also necessitate proper management of the resources and functions of subsidiary firms so that revenue and value of assets remains high. Economic risks arise out of changes in the present value of future cash inflows. Such risks relate to the economic conditions of the parent and the host nations. The net domestic trade results affect such risks. Mitigating such risks are not in the hands of the firm, however suitable risk mitigation contracts may reduce the impact of such risks (Christoffersen and Diebold, 2000). In order to reduce the impact of different exchange rate risks, Laird plc is seen to make use of hedging strategies. Forwards contract and cross currency swaps are the most common type of hedging instruments used for mitigating such risks (Cheung and Wong, 2000). Through the forwards contract, the firm is able to fix the exchange rate and prevent incurring losses. The currency forwards provides the flexibility of being altered in the long run in terms of amount and period. However, in order to be able to use such a risk removal strategy, the firm is required to be able to predict future rates of exchange accurately (Eiteman, Stonehill and Moffett, 2007). Additionally, the cross currency swap is also used by the company to mitigate interest fluctuations. Laird plc is also seen to utilize the natural hedging techniques for mitigation of exchange rate risks as it is a cost effective measure. Natural hedging relies upon the efficient management abilities of matching incomes and expenses for the future period (Brown, 2001). Political risk management Political decisions and policies may adversely or favourably impact the operations of a nation (Cherian and Perotti, 2001). In order to mitigate political risks, Laird plc is seen to establish strict regulatory and corporate practices which monitors and controls its interaction with different government authorities. The political risks faced by Laird plc in terms of their operation can be adequately divided into firm, country and global risks. Firm based Firm based risks arise out of the government policies existing in the host and parent nation, which impacts the functions of firm and its subsidiaries. In order to mitigate such risks, companies are seen to sign contracts with the government, obtain insurances and contacts of guarantee which fixate different business policies. In order to minimize the conflicts and thereby the risks associated with government policies, it is advantageous for the firm to make its objectives and operational aims close to the objectives laid down by the government (Minor, 2003). Further the firm can successfully mitigate political risks by complying with government implemented trade and regulatory practices. Laird plc has appointed a team of strategic leaders who ensure that political conflicts of the firm with the government in the operating nation remain low. Political risk identification must be carried out by a firm before they start their operations in a given region (Keillor, Wilkinson and Owens, 2005). This enables them to understand whether the firm would be able to operate effectively in the host nations. Laird plc is also required to respect host nations business policies with hostile nations. Policies regarding prohibited dealings with different social groups, such as drug dealers and smugglers must be fully followed in order to avoid legal consequences and developing negative relations with the government of the host nation (Moran, 2001). Country based Country based risks arise when the firm is unable to comply with the norms of business, as established by the government of the nation (Hubbard, 2009). Most governments, across different nations formulate policies which ensure healthy competition amongst domestic and international firms. Healthy competition amongst firms of the same industry is essential for maintaining price stability and developing a good business environment (Hood and Nawaz, 2004). Laird plc is seen to compete with firms of host nations and in its parent nation in a sound manner, without violating any government established rules. Laird plc also ensures that its activities have a positive consequence upon the society where it operates. This necessities generation of employment opportunities and providing goods and services that enhance social legacy. In order to address issues faced by the public, consumers and other interest groups, the company has formulated a special division in each of its location of operation (Diprose, et al., 2008). Additionally, the company has developed strict governance principles which ensure that internal corporate information is not provided to external parties. Another important method by which Laird plc mitigates country based political risks is through the proper compliance of tax regulations. It is essential for a company to ensure that tax related rules are suitably obeyed so that conflicts with government do not arise. Country based risks and their mitigation to a very large extend depends upon the manner in which the firm operates in the society (Eydeland. and Wolyniec, 2003). Global risk management Global risk management refers to the manner in which the firm deals with different rules and regulations existing in host nations (Lehar, 2005). Being a multinational firm, Laird plc is required to abide by the formal government policies established by various nations. Laird ensures that it is able to adequately meet the rules established in respect of conservation of the environment. In respect of mitigating political risk arising out of global operations, it becomes essential for the organization to ensure producing those types of goods and services which enhance the value of the host nation (Al Khattab, Anchor and Davies, 2007). As a result, it becomes essential for the organization to collaborate organizational objectives with the objectives of the nation as a whole. Laird plc ensures that its activities do not harm or break the laws of the host nations in any manner. In order to minimize political risks and develop greater understanding with the host nation, Laird plc is seen to familiarize itself adequately with the host nations traditions and cultures. This also facilitates generation of better communication between the company and the social environment of the host nation (Busse and Hefeker, 2007). Conclusions and recommendation Laird plc is seen to be able to manage risks which arise out of currency fluctuations and the political environment of the host nation very efficiently. This gets reflected through its sound financial position. The company suitably understands that being a part of the technology industry, Laird is required to consistently innovate and develop itself. However, it is observed that Laird plc many at times remains unable to contribute towards the goals of developing nations. Very fewer efforts have been taken by it to enhance the social value of emerging nation. Providing advanced technology solution art at cheaper costs should be the prime motive of Laird while operating in emerging nations. This will not only facilitate increasing revenues, but reduce the political and social risks arising from such areas of operation. Direct involvement with the community and solving their problems, providing valuable goods and services, and generating employment opportunities must be the prime motives of the organization for mitigating risks which arise out of international operations. Reference list Al Khattab, A., Anchor, J. and Davies, E., 2007. Managerial perceptions of political risk in international projects. International Journal of Project Management, 25(7), pp. 734-743. Allayannis, G., Ihrig, J. and Weston, J. P., 2001. Exchange-rate hedging: Financial versus operational strategies. American Economic Review, 1(1), pp. 391-395. Andersen, T. G., Bollerslev, T., Diebold, F. X. and Labys, P., 2001. The distribution of realized exchange rate volatility. Journal of the American statistical association, 96(453), pp. 42-55. Berkowitz, J., 2001. Testing density forecasts, with applications to risk management. Journal of Business & Economic Statistics, 19(4), pp. 465-474. Brigham, E. and Houston, J., 2011. Fundamentals of financial management. Connecticut: Cengage Learning. Brown, G. W., 2001. Managing foreign exchange risk with derivatives. Journal of Financial Economics, 60(2), pp. 401-448. Burnside, C., Eichenbaum, M. and Rebelo, S., 2001. Hedging and financial fragility in fixed exchange rate regimes. European Economic Review, 45(7), pp. 1151-1193. Busse, M. and Hefeker, C., 2007. Political risk, institutions and foreign direct investment. European journal of political economy, 23(2), pp. 397-415. Cherian, J. A. and Perotti, E., 2001. Option pricing and foreign investment under political risk. Journal of International Economics, 55(2), pp. 359-377. Cheung, Y. W. and Wong, C. Y. P., 2000. A survey of market practitioners’ views on exchange rate dynamics. Journal of International Economics, 51(2), pp. 401-419. Christoffersen, P. F. and Diebold, F. X., 2000. How relevant is volatility forecasting for financial risk management? Review of Economics and Statistics, 82(1), pp. 12-22. Cornett, M. M. and Saunders, A., 2003. Financial institutions management: A risk management approach. New Jersey: McGraw-Hill/Irwin. Diprose, R., Stephenson, N., Mills, C., Race, K. and Hawkins, G., 2008. Governing the future: The paradigm of prudence in political technologies of risk management. Security Dialogue, 39(2-3), pp. 267-288. Dominguez, K. M. and Tesar, L. L., 2006. Exchange rate exposure. Journal of International Economics, 68(1), pp. 188-218. Eiteman, D. K., Stonehill, A. I. and Moffett, M. H., 2007. Multinational business finance. New York: Pearson/Addison-Wesley. Eydeland, A. and Wolyniec, K., 2003. Energy and power risk management. New Jersey: John Whiley and Sons. Heaton, J. B., 2002. Managerial optimism and corporate finance. Financial management, 1(1), pp. 33-45. Hood, J. and Nawaz, M. S., 2004. Political risk exposure and management in multi-national companies: is there a role for the corporate risk manager? Risk Management, 1(1), pp. 7-18. Hubbard, D. W., 2009. The failure of risk management: why its broken and how to fix it. New Jersey: John Wiley and Sons. Keillor, B. D., Wilkinson, T. J. and Owens, D., 2005. Threats to international operations: dealing with political risk at the firm level. Journal of Business Research, 58(5), pp. 629-635. Laird plc, 2013. Enabling Global Connections. [pdf] Laird plc. Available at: [Accessed 28 November 2014]. Lehar, A., 2005. Measuring systemic risk: A risk management approach. Journal of Banking & Finance, 29(10), pp. 2577-2603. Marchica, M. T. and Mura, R., 2010. Financial flexibility, investment ability, and firm value: evidence from firms with spare debt capacity. Financial management, 39(4), pp. 1339-1365. McMenamin, J., 2002. Financial management: An introduction. London: Routledge. Minor, J., 2003. Mapping the new political risk. Risk management-new york, 50(3), pp. 16-21. Moran, T. H., 2001. International political risk management: exploring new frontiers. Washington D.C: World Bank Publications. Parker, L. D., 2003. Financial management strategy in a community welfare organisation: a boardroom perspective. Financial Accountability & Management, 19(4), pp. 341-374. Sarno, L., 2005. Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand? Canadian Journal of Economics/Revue canadienne déconomique, 38(3), pp. 673-708. Van Horne, J. C. and Wachowicz, J. M., 2008. Fundamentals of financial management. New Jersey: Pearson Education. Vanhorne, J. C., 2000. Fundamentals of financial management. New Jersey: Prentice Hall Books. Read More