StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

The Risks that UK Coal Can Potentially Face in Undertaking Cross-Border Merger - Case Study Example

Cite this document
Summary
This case study "The Risks that UK Coal Can Potentially Face in Undertaking Cross-Border Merger" provides a critical analysis of the risks that UK Coal, an FTSE listed company, can potentially face in undertaking cross-border mergers and acquisition (M&A) activity…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.5% of users find it useful
The Risks that UK Coal Can Potentially Face in Undertaking Cross-Border Merger
Read Text Preview

Extract of sample "The Risks that UK Coal Can Potentially Face in Undertaking Cross-Border Merger"

Section A You are required to critically evaluate the statement of “By simply acquiring a foreign company we can avoid a whole host of risks and concentrate on creating shareholder wealth” Your answer should display a knowledge of contemporary academic evidence regarding the success or failure of international Mergers and Acquisitions. This report provides a critical analysis of the risks that UK Coal, a FTSE listed company, can potentially face in undertaking cross-border merger and acquisition (M&A) activity. The report will also discuss the impacts foreign direct investment has on the host as well as home countries. Cross-border mergers and acquisitions are complex undertakings packaged with risks and rewards. When two organizations with different internal controls, management styles, corporate cultures and processes attempt to integrate, business risk increases substantially (ACL Services, 2002). Before embarking on M&A journey, it is imperative that all risk factors are considered prior to injecting capital in the host country. UK Coal needs to conduct due diligence so as to ensure that M&A activity fits its long-term strategic objectives. Due diligence identifies, confirms or disputes the business reasons for proposed merger or acquisition transactions. Due diligence demands a thorough data analysis of assets and liabilities, particularly large balance sheet items such as accounts receivable, inventory, and accounts payable to establish fair market value (ACL Services, 2002). It is imperative that a fair value for the business is accurately established so that a reasonable price is paid for the target assets. A careful analysis of the target company’s financial statements avoids incidents of overpaying and mismanaging shareholders’ expectations. Differences in corporate culture, business practices, and institutional layouts can hinder firms from fully realizing their potential. According to a KPMG study, 83 percent of all M&As failed to economically benefit the shareholders and over 50 percent actually destroyed value. A research was conducted involving over 100 senior managers to determine the reason behind this failure which turned out to be the cultural differences (Shimizu, Hitt, Vaidyanath, Pisano, 2004). In pursuing a cross-border M&A, it is vital for an organization to assess the political situation prevailing in the target country. This assessment will not only uncover any potential political risks but also prepare the host company to face them and find appropriate solutions for them. Another potential barrier to a successful M&A activity is lack of knowledge about the target company. Knowledge about the company leads to a successful post-merger integration. Another factor that should be taken into account is the effects of trade impediments on cross border M&A. Academic studies have found that on an aggregate basis, trade costs affect merger activity negatively, though the effect is less pronounced for horizontal mergers, i.e. mergers between firms within the same industry (Hijzen, Gorg, Manchim, 2005). UK Coal needs to ensure that its target company is one which will lead not only to economical but also intercultural synergies between the two companies. To identify an appropriate acquisition target, aforementioned due diligence should be adequately employed. Moreover, UK Coal needs cognizance in matters relating to exchange rates, local accounting standards, foreign government potential trade regulations, etc. (Saavedra-Lim, 1998). UK Coal should have information regarding its local competitors in the host country and their respective market positions. This will lead to reasonable projections and estimates for the business. Expectations of UK Coal from this activity should be realistic and in parity with the overall strategy formulated at the design stage. Regulatory aspects also need attention to avoid any legal risks. Competent professionals (lawyers, accountants) must be hired to provide financial and legal opinions regarding the merger or acquisition transaction. Having conducted the above risk analysis, managers can place themselves in a position to thoroughly understand the value of the M&A activity they are undertaking. Failing to understand these risks can demolish the much-touted synergies of consolidating two entities. Poorly executed mergers and acquisitions can lead to steep declines in the UK Coal’s share prices. Section B You are required to critically discuss, with reference to your chosen company, how an international company can evaluate and prepare for the risks which accompany international investment. International investment requires an examination of inherent risks. These risks can entail foreign exchange, political, regulatory, social, and expropriation risk. Prior to making a significant capital contribution to a foreign country, UK Coal needs awareness of the various risks involved. A proper approach to conducting risk analysis should be employed. For example, a top-down approach which analyses the overall economy, industry group and finally the company. On the other hand, a bottom-up approach starts at the company level and works its way up to industry and the country analysis. Analyzing the risk inherent in a country involves examining the prevailing economic policy and the political environment. Political environment and economic cycle affect overall investment scenario in a country. For example, a politically stable country attracts foreign direct investments. Moreover, an expanding economy is a catalyst for foreign investments. Industry analysis involves analyzing prevailing trends in a particular industry, analyzing competitors, and identifying opportunities and threats in the industry. Analysis at the company level is about product diversity, local experience, and market position. Social risk involves intercultural differences. Employees of companies have professional values and preferences regarding the way activities are carried out (Gitelson, Bing, Laroche, 2001). It is the human factor that can literally lead to the success or failure of a particular organization. So the question arises if two different corporate cultures can successfully amalgamate to maximize shareholder value for the company. Cultural risk in an organization justifies reasons for expenditure on training programs whereby people from different backgrounds are brought together and taught cultural values to boost performance. Foreign exchange matters require attention to reduce losses in revenues that can arise from foreign exchange deterioration (Erb, Harvey, Viskanta, 1996). UK Coal needs to take into consideration foreign exchange risks and make reasonable cash flow projections so as to avoid overestimation and, in turn, overstated revenues. Furthermore, tax risk should also be considered in international investments. Assessing the tax impact of cross-border transactions is a complicated task, however, is significant in terms of establishing revenue projections. For example, high taxes can lead to reduced profits and lower earnings per share for a company’s shareholders. This is the implied cost of cross-border investments and needs to be highlighted at the planning stage. UK Coal, headquartered in the UK, is characterized by a favourable corporate taxation environment. Management of UK Coal should seek geographical diversification in countries characterized by low taxes. Risk related to regulation involves consideration of any potential governance that the country may have on the international investment. To mitigate such risks, services of professionals should be hired for sound guidance on regulatory matters. It would be a good idea to seek reports on the country’s riskiness which would give a fair idea about its political and regulatory environment. Expropriation is another form of risk encountered in international investments whereby a private business is seized from its owner. Though rarely occurring, this risk is enhanced in countries that lack well-defined property laws. Summing the above information, before undertaking international investment it is crucial to examine the risks that can potentially offset the benefits achieved from geographical diversification. REFERENCES ACL Services , 2002. Mergers and Acquisitions www.acl.com. Erb, Claude B., Campbell R. Harvey and Tadas E. Viskanta, 1996, Political Risk, Economic Risk and Financial Risk Financial Analysts Journal. Gitelson, G., Bing, J.W., Laroche, L., 2001. The Impact of Culture on Mergers & Acquisitions CMA Management, 251-266 *Hijzen, A., Gorg, H., Manchim, M., 2005. Cross-Border Mergers and Acquisitions and the Role of Trade Costs. GEP Research Paper 05/17, University of Nottingham. Saavedra-Lim, F., 1998. Mergers and Acquisitions: A Perspective of Associated Risks Credit and Portfolio Management Division, Pitney Bowes Financial Services. Shimizu, K., Hitt, M.A., Vaidyanath, D., Pisano, V., 2004. Theoretical Foundations of Cross-Border Mergers and Acquisitions: A Review of Current Research and Recommendations for the Future. Journal Of International Management J. 10, 307-353 Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“The Risks That UK Coal, an FTSE Listed Company, Can Potentially Face Case Study”, n.d.)
The Risks That UK Coal, an FTSE Listed Company, Can Potentially Face Case Study. Retrieved from https://studentshare.org/business/1525071-international-business-finance
(The Risks That UK Coal, an FTSE Listed Company, Can Potentially Face Case Study)
The Risks That UK Coal, an FTSE Listed Company, Can Potentially Face Case Study. https://studentshare.org/business/1525071-international-business-finance.
“The Risks That UK Coal, an FTSE Listed Company, Can Potentially Face Case Study”, n.d. https://studentshare.org/business/1525071-international-business-finance.
  • Cited: 0 times

CHECK THESE SAMPLES OF The Risks that UK Coal Can Potentially Face in Undertaking Cross-Border Merger

The Impact of Cross Border Mergers between the Other Countries and the UK

A merger is a business process by means of which, two or additional number of companies can pool their business assets and form a single organization.... merger is a business process by means of which, two or additional number of companies can pool their business assets and form a single organization.... In the inward cross border merger, the entire or parts of domestic companies are put up for sale to overseas investors, which result in inward movement of capital....
21 Pages (5250 words) Dissertation

The Impact of 2008 Financial Crisis on UK's Cross Border Mergers

This research discusses the strategic ways on how to implement a cross border merger followed by analyzing the advantages of investing through them and tackles in details internal and external factors that need to be considered prior to a merger, the reasons for behind a successful or failed overseas mergers, impact on the shareholders' value and the trend of global mergers post the financial crisis.... Cross Border merger as a Value Creating Strategy ....
36 Pages (9000 words) Dissertation

The Importance of the Counterfactual in Merger Assessment

Mergers or acquisitions are therefore assessed if it would significantly impede effective competition for being anti-competitive or strengthens dominance—thus an inquiry shall be made by the competition authorities to determine its impact on the market whether competition is still functioning effectively despite the merger or acquisition and the same is beneficial to the public in general....
19 Pages (4750 words) Essay

International Mergers and Acquisitions - JP Morgan

The paper "International Mergers and Acquisitions - JP Morgan" discusses that JP Morgan concentrated on the British culture and left the banking operations responsibility on a person who has served the Cazenove bank for around 40 years and the merger turned around to be a huge success.... The companies generally enter into merger acquisition for the purpose of enhancing long-term competitive advantages in the support of strategic goals.... The notion with which the acquiring and the target companies feel that they can reap potential benefits by financing, mutual cooperation in the inter as well as intra industry environment without the utilization of mammoth cost and new infrastructure development....
21 Pages (5250 words) Essay

Economic sense of Mergers and Acquisitions: Case of BAE Systems and EADS

Production can be organized in three different ways (Craig and Campbell 114).... A firm can merge with other firms up or down the line of production.... Mergers and acquisitions can take the form of vertical integration, horizontal integration or conglomerates.... Firms can diversify with the aim of increasing their financial performance, exploiting the available business opportunities or other reasons....
7 Pages (1750 words) Essay

Impact of Mergers and Acquisition on the Performance of BAE Systems

Production can be organized in three different ways (Craig and Campbell 114).... A firm can merge with other firms up or down the line of production.... Mergers and acquisitions can take the form of vertical integration, horizontal integration or conglomerates....
8 Pages (2000 words) Essay

Advantages, Disadvantages, and Roles of International Mergers and Acquisitions

A number of M&As theories and concepts have been developed such as empire building, disciplinary and synergistic, hubris hypothesis, and market power gain, which are not mutually exclusive because a firm can decide to gain market power and at the same time focused on building an empire....
14 Pages (3500 words) Essay

The Role of Culture in Cross-Border Mergers

It plays a significant role in ensuring that employees are satisfied and maintain their performance after the merger.... Apart from culture, there are other factors that affect the outcome of the merger.... This relationship helps in enhancing the employees' performance in order to facilitate the realization of the goals of the merger.... From the paper "The Role of Culture in cross-border Mergers" it is clear that people are significant in determining the ultimate outcome of the mergers and acquisition....
26 Pages (6500 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us