Fn0264 International Business Finance And Assessment Answers

Section 1: International Finance

“In 2008, one of the most significant events in the automotive industry took place when Indian-based TATA Motors completed their acquisition of British luxury automotive company, Jaguar Land Rover in a deal worth an estimated US $2.3 Billion. This acquisition included all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK, a worldwide network of sales companies and more importantly adding these two luxury brands to a line-up that already includes the low-cost Nano.”

“In 2008, one of the most significant events in the automotive industry took place when Indian-based TATA Motors completed their acquisition of British luxury automotive company, Jaguar Land Rover in a deal worth an estimated US $2.3 Billion. This acquisition included all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK, a worldwide network of sales companies and more importantly adding these two luxury brands to a line-up that already includes the low-cost Nano.”

Section 2: International Investment and Trade

“Crosswell International, a U.S.-based manufacturer and distributor of health care products has been approached by Material Hospitalar, a distributor of health care products throughout Brazil who are interested in distributing Crosswell’s diaper products. Considerable competition already exists in the Brazilian Market, so pricing and therefore cost control will be critical for the success of this collaboration.”

A.Mandatory question:

Discuss the exposure to currency risk that Crosswell International faces in its dealing with

Material Hospitalar and examine the methods of hedging it could engage with to protect itself from this.

B.Additional questions

i.Discuss how the various stages and their costs impact the ability of Crosswell as an exporter in being competitive on the pricing of its products in penetrating the Brazilian market.

ii.Using an example of Croswell in Brazil, you are to discuss and apply management guidelines to minimize the costs of funding working capital requirements in trading with countries of different payment terms practices.

Section 1: International Finance 

Mandatory question 

Answer to question A: 

The three elements of cross border merger and acquisition are as follows;

Identification and valuation: Identification and valuation of possible acquisition targets necessarily needs precise business strategies. The recognition of target market heads with the recognition of target firm (Cartwright & Cooper, 2014). It is worth mentioning that emerging organisations needs the service of acquisition specialist who can help in identification of firms that are held privately or owned by government. However, emerging markets acts as the extra problems because of limited depth of management, restrictions of government and overseas purchase with the fact that new firms are publicly traded. Once the process of identification of is completed, the procedure of valuing the target commences. In the modern business world wide variety of valuation techniques is used having their own relative merit.

Settlement of transaction: Once the process of acquisition has been recognized and valued the procedure of obtaining consent from the administration and possession of the target, obtaining approvals from the government and regulatory bodies commences (Larkin & DiTommaso, 2016). However, the method of determining the method of compensation can be considered as time-consuming and difficult.

1. Process of tendering:Obtaining the approval of the target company is subjected to obtaining the approval as to whether the acquisition is supported or not by the management of the target company (Bena & Li, 2014). The acquiring company might opt to pursue the process of acquisition without the support of Target Company and may approach the shareholders directly. A tender offer is made publicly even though the management of Target Company might recommend its shareholder to reject the offer.
2. Compensation settlement:The final stage in the cross border acquirement is making imbursement to the shareholders of the company that is targeted (Judd, 2016). Shareholders of the company that is targeted are generally paid either in the form of shares of the business that is acquired or in cash.

Post Acquisition administration: The above stated headlines emphasises on the valuation of and procedure of bidding during an acquisition process however post transaction administration is almost certainly regarded as the most decisive of the three phases at the time of determining the success or failure of acquisition process (Galpin, & Herndon, 2014). An organisation that is acquiring might pay either too little or in huge amount however if the post-transaction is not administered appropriately the whole amount of return on investment is squandered. Post acquisition administration is the phase where the motivation of transaction should be realised.

Tata motors on June 2008, acquired Jaguar and land rover units from the US based automobile producer of Ford Motor for US $2.3 billion under the cash free and debt free basis. The parts of purchase considerations acquisition included the JLR manufacturing plants, two advanced designed centres in UK, sales businesses throughout the world and also the licenses of all the necessary intellectual property rights (Cooper and Finkelstein, 2014). Upon acquisition, Tata motors had to incur huge amount of capital expenditure since it had intended to put in another US $1 billion in JLR.

The amount invested in Jaguar Land Rover was in addition to the US $2.3 billion, which Tata had spent on the acquirement process. Tata motors upon acquisition had to incur enormous amount of capital expenditure for the expansion of small car. The acquisition of Jaguar Land Rover seemed to be negative for Tata motors since it appeared negative for the company, it had increased the earnings volatility as the US, and European market is in difficult conditions. It was attached with recession in the international car industry and this was anticipated to create an impact on the productivity of the business in the upcoming future. Upon acquisition of Jaguar Land Rover, Tata group endeavoured to preserve and build the heritage and competitiveness of the company (Pathak & Pathak, 2016). Tata motors aims to preserve the greatness of the company by supporting its growth and holding the true principles of management.

Answer to question B (I):

The reputation of the group and relational contracting forms the most important assets for Tata. This represents the chance of sharing the profit from superior image of Tata in India, which is cautiously mentioned, with the help of corporate communication. The core purpose of Tata Motors is to progress the value of the life of the communities by serving internationally through the long-term stakeholder establishment of value based on leadership and trust (Borah et al., 2016). It is noteworthy to denote that better corporate citizenship forms the part of Tata group “stakeholder value creation”. Approximately 60 per cent of the Tata group equity forms the part of the Tata sons being the promoter of the holding company so that it can return wealth to the society. Due to such unique structure of ownership and culture of serving the community, Tata Motors has strongly complied with the stakeholder value creation and business ethics. The sustainability vision of Tata Motors aims to ensure that the growth of the business responds to the international trends and needs of stakeholders.

Sustainability forms the basic to the status of Tata brands by creating productivity and faith of the stakeholders. The global challenges form the integral part of development of Tata motors sustainability strategy since the company aims to steady the requirements of the business together with the requirements of the stakeholders (Yadav, 2013). The company communicates and listens to its stakeholders that acts as a key in ensuring that the strategy undertaken to address the issue is vital to them and sunder standing the sustainability impacts to tackle the issues. Tata motors indulged with wide range of stakeholders in order to make sure that the company understands the expectations of the stakeholders by keeping track of the sustainability movements in the automotive business (Kapil, 2015).

Tata communicates the position of its company to its stakeholders by addressing and forming key opinion on pertinent with its stakeholders. Tata extensively work with its stakeholders such as confederation of British industry, skill funding chamber of commerce and the society of motor manufacturing so that it can share data on skills, gender ageing in labour force, education and training and development. Tata also work with the local government in the fields that surrounds the company sites and holds ordinary meetings with the community so that it can share and exchange information. Tata motors held stakeholder meeting in London in order to seek views from the opinion formers and programs on carbon offsetting. Such stakeholder meetings have helped Tata to acquire useful information, which it ensures to make use in its business for future growth and development.

The management of the Tata Motors ever since the acquisition of Jaguar Land Rover is long term and strategic owner by being completely dedicated to the company plan and product lines. Tata is guided its by its sustainable development policy that helps in laying down the guidelines of making constructive contribution to the community and the environment (Bhatia & Tuli, 2014). The policy ensures commitment to Jaguar Land Rover so that it can act sensibly and morally towards its stakeholders, employees, shareholders, suppliers, dealers, society and environment. The management goal is reflected through community engagement ever since the acquisition of Jaguar Land Rover. This is because it is the constituent of business community an establishment that encourages company to constantly enhance the impact on the society. Ever since the acquisition of Jaguar Land Rover, the management has been constantly engaged with its stakeholders through the carbon disclosure project. Tata motors evaluate the progress by measuring against the environmental goals with the help of environmental innovation scorecard. The managements goals is reflected through annual target set by the Tata Motors in its balance scorecard. The balance scorecard is linked with the objective of employees in order assure that the environmental innovation forms the business priority and understood by everyone at Jaguar Land Rover. The management anticipates everybody at Jaguar Land Rover to function sensibly and ensure sustainability in their everyday performance.

Management of Tata Motors has annually reported on its carbon emission and carbon strategy. Moving forward, the management goal of the Tata companies is reflected as they are building international business with the objective of differentiating themselves through consumer centricity, invention, entrepreneurship, dependability and value driven commercial functions. This is done by maintaining the balance in the interest of diverse stakeholders, which also includes shareholders, employees and civil society.   

Section 2: International Investment and Trade

A: Mandatory Question

Foreign exchange exposure is classified into three types namely transaction, translation and financial exposure. Foreign exchange exposure can be defined as the circumstances when the value of the future cash flows is reliant on the worth of the foreign exchange currency or currency. In light of this, the main currency risk exposure that Crosswell International faces while dealing with Material Hospitalar are as follows;

Transactions Exposure: This is regarded as one of the simplest kinds of foreign exchange currency exposure which Crosswell International faces with Material Hospitalar.. These kinds of exposure can take place due to the exposure to the transaction-taking place with Material Hospitalar involving foreign currency (Hutson & Laing, 2014). It is worth mentioning that in business each monetary transactions involves profits as its ultimate result. There is a huge chance of final objective of crosswell international is hampered with Material Hospitalar if the foreign currency translations and currency market of brazil moves towards the unfavourable direction. If the Cross international deals in goods with Material Hospitalar and the payables are in overseas currency to be paid after three months then it may end up paying greatly higher or receive much lesser due to the increase or decrease in currency. This will ultimately increase the cost of the acquisition price and the overall costing of the product might compel the revenue percentage to go down or exchange to loss.

Economic exposure: The impact and consequence of this type of exposure is considered to be much higher than the transaction and translation exposure. Economic exposure can directly create an impact on the value of Crossways International (Wei & Starks, 2013). This represents that the worth of the organisation is prejudiced by the foreign exchange. The value of the firm represents the functions of operating cash flows and assets possessed by Crossways International. The economic exposure can create bearings upon the assets and operating cash flows ofCrossways International. It is worth mentioning that recognition and measurement of this exposure is regarded as complex. Even though the exposure of assets is still quantifiable and noticeable in the books but the operational exposure of Crossways International is associated with several factors (O'Brien, 2014). These factors include, competitiveness, barriers to entry etc. that are very subjective.

To minimise such exposure to currency risk Crossways International can undertakes the methods hedging so that it can protect itself. The methods of hedging are as follows;

Forward contracts: Transactional risk can be hedged by making the use of financial products. The forward market can enable Crossways International to purchase and sell currency on the fixed future date at a preset rate namely the forward rate of exchange. This ultimately helps in fixation of future rate.

Money market hedges: The fundamental idea of Crossways International should be to keep away from the uncertainty of future exchange rate by building the exchange of currency at the current spot rate (Krapl & White, 2016). This is done by depositing or borrowing the foreign currency till the genuine business transaction of cash flows takes place. This would efficiently help Crossways International to fix the future rate.

Future contracts: Future contracts can be defined as the standard size instrument of hedging trade. Crossways International can fix an exchange rate at a particular date which is subjected to basic risk.

Forex swaps: Under the forex exchange, the parties could be in agreement to exchange an equal sum of currency for a certain period and then re-exchanging them following the end of the time at an agreed exchange rate. Crossways International can in advance agree with its parties to the swap rate and amount of currency (Ye et al., 2014). This will provide Crossways International to hedge against the forex risk probably for a long time than it is probable on the forward marketplace. Forex exchange could be useful for Crossways International while trading with countries that have exchange control or having unstable exchange rate.

Currency swaps: A currency exchange can allow two oppose parties to exchange the interest rate obligations on borrowing for diverse currencies. Currency swap can be performed in two ways first an swap of principal in different currencies that are swapped back to their original spot rate (Menkhoff et al., 2016). Secondly, an exchange of interest rate which is dependent on the timing of the individual contract. The swapping of rate of interest can be either fixed or variable for the period.

Options: A currency options for Crossways International can be correct however, it does not forms the obligations to purchase or sell at the exercise price upon a future date. If there is a positive movement in the exchange rate Crossways International may enable the choice to lapse in order to take benefit of the favourable movement (Chong et al., 2014). A call options will provide Crossways International the right purchase underlying currency whereas a put option will provide Crossways International the right to sell the underlying currency.      

Answer to B: Additional Questions

Answer to (i)

Crosswell International needs to know all the cost and the pricing assumptions for the entire amount of supply and value chain as it enters into the Brazilian market. The management of the crosswell must believe that it is critical for the management and consumers to enter into the Brazilian marketplace, which is both fair to all parties and competitive in the given market which crosswell international hopes to, penetrate (Jayasinghe & Tsui, 2014). Crosswelll proposal of entering into the Brazilian market represents that it must cover all the costs that is associated with the diapers to get into the market of Brazil. Till the latter part of the 1980 a large number of Brazilian had never heard of the disposable diaper and not astonishingly, the disposable hygiene market of Brazil was almost non-existent. However post 1995, the personal care market of Brazil is growing and the growth is largely attributed to the new founded economic steadiness and mounting middle class. Since both the middle class and educational class of level concerning hygiene must expand, the personal care market must also expand. By the early years of 1995, the Brazilian disposable diaper market started growing with the purchasing power of the Brazilian middle class starting to increase. Market penetration is considered as one of the four alternative growth strategies which crosswell international must adopt (Scholes et al., 2014).

The market penetration strategies of crosswell consist of focussing on selling and the existing products in the current market of Brazil so that it can gain a higher market share. The market penetration strategy involves selling more to the current set of customers and to the new set of customers that can be thought of prevailing in the same market. The company must consider one of the key strains that is it cannot allow anything in its drive so that it can grow the market share to negotiate their current success. Crosswell needs to be conscious that it has made the merchandise an achievement and it must make sure that it should not do anything that will undermine the success of the company. Crosswell must give their strategy a consideration since they are comfortable in taking risks since the sum of risk is connected with this policy is regarded as comparatively low.

Securing the dominance of market growth: This is one of the approach which Crosswell could take to recognise the demographic of its product. One of the excellent examples of such kind of strategy is for the company to recognize the change in the age group distribution of its product users and then aggressively marketing its product to this age group (Lee, 2014). Substantial expansion in the Brazilian market share and supremacy in this segment was attained by assuring that the diapers promotions meet the requirements of the younger group.

The role in the conversation of senior executives will have crucial strategies by providing the market with customer intelligence and feedback from customers so that it can help to inform the executive team regarding the current dynamics of the Brazilian market. This kind of data will help Crosswell International to decide whether the growth in the market represents the extension of the existing market or it entirely a new market. This decision of market penetration in brazil represents that the growth of the company in new market.

Restructuring the market and driving out the competitors: Several organisations have found themselves under the mature and saturated market and to attain further market share several different approach needs to be taken. This kind of strategies requires aggressive campaigns for promotions, which is supported by pricing strategies that is intended to build the market unappealing for lesser group of competitors (Kim & Mauborgne, 2014). Having a mature market share there are demographic sector to explore and for Crosswell the only way of taking market share is taking it out from the competitors.

Increasing the use of present customers: Another approach that can be taken into the considerations for Crosswell International is the persuading the existing set of consumers to use their product or service more regularly. There are large number of strategies which it could use is to include the loyalty of the current product by altering the product which encourages greater use (Grant, 2016). The tactics under this approach is to aim their customers to add their goods or service by making hard for consumers to move towards an additional dealer. The capability Crosswell is to achieve higher usage by customers that can be greatly enhanced to the changing rapid technologies and encouraging their users to purchase the upgraded version of product by offering more valid reasons to use the product or service.     

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