International Finance Paper Home Depot - Essay Example

International Finance Paper (Home Depot) The Home Depot Inc (HDI) is an American retailing giant, involved with the business of retailing, home improvement and construction products. Starting with just two stores in 1979, the company now boasts of 2223 mega stores which are spread across all the 50 districts of the country as well as Canada, Mexico and China. Its head quarters are situated in Atlanta. The company has grown phenomenally till 2007 but since then its fortunes have been negatively affected by the economic recession. The recession had resulted from the downturn in the housing market, which happens to be the principle business of the company. During the years 2008 and 2009, the company was forced to lay off more than a thousand employees and 54 stores across US had to be closed. This includes the whole of the EXPO Design Centre Chain, which was engaged in high end retailing. In the year 2009 the company logged a sales figure of $71.288 billion, which was $20 billion less than was at it was in 2007. This paper deals with the various financial issues encountered by Home Depot during the course of its operation and talks about the measures, which the company is undertaking to deal with the same. As a business policy, HDI was engaged in mergers and acquisitions from the early days of its operations. The company also later on diversified its operation into other countries like Canada and Mexico, where in it needed expert advice on the various complex issues related to international finance. In these circumstances the company made a deal with Invemed Associates, who are engaged in the business of investment banking. An investment bank has departments like the Corporate Finance, which deals in the areas of mergers and acquisitions along with providing finance related consultancy to the clients. Another important division in the company is of the Research, which is concerned with analysis and valuation of shares and bonds, the recommendations on which are then presented to the clients. An investment bank also provides consultancy to their client’s for raising debts and equity from the market. Invemed Associates is required to constantly monitor the financial health of HDI and report on the same to the Board of Directors of HDI. Invemed is also required to inform the board on any economic trend that is relevant to the type of business in which the company is engaged in. Invemed Associates advises HDI every time it wishes to borrow money from the market or issue securities to the public. (FindLaw, 2009) Before the sale of Home depot supply in 2007, the company had grown virtually through the mergers and acquisitions, ably assisted by the competency of the investment bankers. Earliest instances of acquisition made by the company include those of the maintenance warehouse in 1996 and Apex supply (HVAC distributor) in 2000. Among its most important acquisitions is the purchase of Hughes supply, which was a distributor of construction and repair equipments. This acquisition which was carried out in 2005 had doubled the capacity of Home depot supply. (Souers, January 11, 2006) Among its other important acquisitions are the national waterworks holdings in 2004, which was a distributor of products used for repairing and maintaining water transmission systems. (Modern Distribution Management, July 20, 2005) even in the foreign markets like China, the company had grown mainly through acquisitions. In 2006, it brought Home Way, which was an indigenous home products retailer of China having twelve stores in six cities. This acquisition has proved to be very helpful in understanding the Chinese market which has been estimated at close to $50 billion and growing at a rate of 20%. (PRNewswire, Dec. 13, 2006) Proper management of finances through the investment banking facilities has made it possible for the company to get the necessary liquidity from the operating activities itself. The company’s access to the capital market, its subscription to the commercial papers along with the long term credit backing from the banks has helped in making the financial position of the company stronger. HDI’s financial structure has been well managed and till the end of fiscal year 2008, the company’s securities are considered of investment grade and it had no obligation on the part of the commercial papers as well. There have also been few instances where the financial decisions of the company have both been up to the mark. For example, HDI repurchased 2.4 million shares in 2008 and 293 million shares in 2007, with the payments of $70 million and $10.8 billion respectively. After such aggressive share repurchase the company has decided to suspend the same in 2009 due to adverse market conditions. In the same context it can be said that the One of the main reasons for the poor performance of the company was its sale of the wholesale division HD Supply in 2007. This business had a turnover of $13 billion and was engaged in the distribution of construction materials in US and Canada. It was apparently sold to finance a $40 billion buy back of stocks.   Many of the financial decision making activities of the company are being affected by the decision making bodies of the government. The regulatory environment dealing with the various aspects of business is becoming more and more complicated and the implementation of the same in the company has proved to be costly time consuming. The most important government agency in the regulating the financial securities market is the Securities and Exchange Commission (SEC). One such area in which SEC has intervened relates to the matters involving the stock option allocating policies of the company in the year 2006. Later on information on the same was also solicited by the Office of the US Attorney. Due to this the company had to forgo its stock option plans for a period of at least two years. Along with the financial issues, there are also some other circumstances in which the SEC can get involved with a company. In one such case the SEC has asked HDI to provide information on the company’s return to vender policies. This issue has been brought to the notice of the commission by a former employee of the firm who has accused HDI of following unethical practices in this regard. A separate case filed under the Securities and Exchange Act of 1934, relates to the derivative dealings of the company. This case was filed by some shareholders of the company in 2006, demanding among other things full reimbursement of the charges of the litigation and also reimbursement of other costs. Under the provisions of the act, the company not only had to pay the required amount in damages but it also had to agree on implement certain changes in the corporate governance practices of the company. Cases have also been filed against the company for the violation of the Employee Retirement Income Security Act. This along with a few other cases filed by the employees against the company has forced the company to make a separate provision in the balance sheet, so as to deal with any kind of contingency associated with the same. Further damages have been claimed on the company under the Fair Labor Standards act by some of its employees. The company has stated in its annual report for the year 2008 that if the decisions of the courts go against the company, then the settlement amount may prove to be a huge burden on the finances of the company. Among the other provisions of the regulatory bodies which are adversely affecting the financial decision making of the company includes the notice by the Office of the Attorney regarding the handling, storage and the eventual disposal of the hazardous materials. The company has also received an “Administrative Order and a notice of civil Administrative penalty”. This notice seeks to implement penalty on the company for the violation of the record keeping requirements. (Annual Report 2008)  An MNC like HDI has to deal with several issues related to international finance management. This can take the form of losses due to not having sufficient knowledge about the local laws and customs. Along with this there is always a risk associated with the investments in the foreign country on account of political and economic conditions of the country of operation. Along with this the regulations relating to foreign currency, tax related matters and loss of revenue from not being able to implement the intellectual property rights are the major challenges faced by the Multi National Corporations in course of their foreign operations. Among all these risks the one related to the foreign exchange fluctuations severely affect the cash flow and the cost of the operations. Although arbitrage and exchange rate swap options are available to HDI to deal with the situation, the company has till now not exercised the same. The company has instead gone in for an interest swap in order to reduce the interest rate burdens on its balance sheet. Under this the company entered into interest rate swap on the $3 billion loan of the company. This loan was on at a fixed charge of 5.4% and has been swapped for a variable rate of LIBOR plus 60 to 149 basis points. The company has received $56 million in the year 2008 on account of these swaps, which has helped in substantially reducing the interest rate burden on the debt obligations of the company. MNC’s also had to make arrangements for providing the long and short term assets in order to keep its operations running. HDI has opted for the leasing arrangements for its outlets. The same arrangement has been done for warehouses as well as the equipments and the vehicles used by the company personnel. In order to manage their stock prices, the MNC’s follow various models like the CAPM (Madura, 2006, p 504.) which helps to determine the risk of the security. One of the matters of prime concern for such companies is that most of the times the share prices of the MNC reacts predominantly to the prices of their shares back home. Although this problem is now reduced as the financial markets are getting integrated across the world.  Another significant challenge that is being faced by the company’s like HDI are the issues related to tax planning. In many cases it happens that the income of the company gets taxed in the country of the operation when the profits are calculated and then again in the country of origin when the same are repatriated. HDI has appointed KPMG as their auditors who have their operations in all the countries where HDI operates. Thus they are able to provide expert advice on such issues whenever need for the same arises. Thus we see that Home Depot has to deal with a plethora of financial issues while operating in the domestic as well as the foreign markets. Successful dealing with these complex issues will decide the future success of the company in this competitive environment.                 References 1. Annual Report (2008), Home Depot, available at : www.homedepot.com/ (accessed on June 27, 2009) 2. FindLaw (2009) Home Depot. Available at: http://contracts.corporate.findlaw.com/agreements/homedepot/invemed.serv.1985.04.17.html (accessed on June 30, 2009) 3. Madura, J. (2006), International Financial Management Cengage Learning. 4. Modern Distribution Management, (July 20, 2005), “The Home Depot to Acquire National Waterworks”, available at: http://www.mdm.com/issues/1_1/breaking-news/2736-1.html (accessed on June 27, 2009) 5. PRNewswire, (Dec. 13, 2006), “THE HOME DEPOT ANNOUNCES ACQUISITION OF THE HOME WAY” available at: http://www.prnewswire.com/mnr/homedepot/26373 (accessed on June 27, 2009) 6. Souers, M. (JANUARY 11, 2006), “Acquisition Builds up Home Depot”, Business Week, available at: http://www.businessweek.com/investor/content/jan2006/pi20060111_5344_pi015.htm (accessed on June 27, 2009) Read More