Business Establishment Assignment 21.07
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<strong>Business</strong><br />
<strong>Establishment</strong><br />
<strong>Assignment</strong><br />
Charlotte Alexander<br />
This is a solution of business<br />
establishment <strong>Assignment</strong> in<br />
which we discuss Developing<br />
business financial and strategic<br />
performance.<br />
O n l i n e A s s i g n m e n t H e l p
Introduction<br />
With the liberalization in trade policies, there are increasing number of new<br />
business establishments taking place all over the world. In many countries<br />
where initiation of new businesses communication by foreign companies is<br />
not easier; entrepreneurs adopt different other routes like acquisition,<br />
mergers, joint ventures and foreign institutional investments. In respect<br />
with this aspect, the following report is carried out to evaluate the<br />
feasibility and profitability of the acquisition of a liquor brand. The firm<br />
aiming to acquire is Suntory which is established in Japan, while the target<br />
business Distill is based in UK. The objective of the report is to analyze the<br />
financial and strategic performance of Distill in terms of profitability and<br />
sustainability.<br />
About Suntory<br />
Suntory is engaged into brewing and distillation since 1899 and is<br />
considered as one of the oldest in the alcohol industry. The enterprise also<br />
produces soft drinks and sandwich as part of its expansion. Suntory jumped<br />
onto international platform and became one of the largest distillation<br />
beverages with the acquisition of Beam Inc in 2014.<br />
About Distill<br />
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Blavod Wines and Spirits plc is engaged into production and marketing of<br />
owned and third party brands across the world. The firm changed its name<br />
to Distill in 2014 in order to reflect the nature of the business. The previous<br />
company was result of the merger between Blavod Black Vodka and<br />
Extreme Beverage.<br />
TASK 1<br />
1.1 Value creation and the success of an M&A<br />
transaction<br />
The acquisition of Distill is not only for the purpose of business and market<br />
share expansion. It equally requires sufficient strategies to support the plan<br />
and deliver desired results. Suntory can also develop the existing Distill<br />
brand and focus on leveraging the benefits from the existing projects.<br />
<br />
<br />
Trust – It is essential for the management of both the brands to develop<br />
trust among themselves, employees and customers to support in managing<br />
operations post acquisition. This is important, so that existing and<br />
profitable projects of Distill remain as usual (Rigby & Bilodeau, 2007).<br />
Trust among the employees is also an important factor in the success of the<br />
acquisition to retain skilled employees.<br />
Common goals – The acquisition deal will succeed when the goals and<br />
objectives of both the companies are similar for the long term aspects<br />
(Weihrich & Koontz, 2005). Difference in the overall goals will impact the<br />
functioning and operation of the larger firm.<br />
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Cost control – The acquisition deal will certainly require huge investment<br />
in various areas. So it is important that Suntory will control cost and<br />
eliminate excess capacity. <strong>Business</strong> areas in terms of physical and human<br />
resources not leading to effective results must be identified and evaluated<br />
for cost purpose (Robinson & Harris, 2000).<br />
Improved market share – Suntory will definitely benefit from the<br />
existing market share of Distill. It is essential for the expanded firm to<br />
maintain the brand image and reputation with the stakeholders to avoid<br />
any unwanted issues (Slack, Comtois and McCalla, 2002).<br />
Research & Development – An important success factor for Suntory<br />
will be the acquisition of human skills and abilities from Distill (Rossi &<br />
Volpin, 2004). The expanded firm can utilize this for R&D and other<br />
important business areas.<br />
Competitive advantage – It is also important for Suntory to continue<br />
maintain the competitive advantage developed by the Distill. Any lost<br />
competitive advantage would hamper the position of Suntory in present<br />
and future (Weihrich & Koontz, 2005).<br />
Combined synergies – The acquisition of Distill will enable Suntory to<br />
gain from the exclusive products and service areas owned by Distill.<br />
Efficient use of employees’ capacities – The expanded larger firm will<br />
increase the number of employees allowing the business to restructure and<br />
utilize full potential of the human force (Slack, Comtois and McCalla,<br />
2002). Existing employees of both the firms can be shuffled and placed into<br />
new groups and projects.<br />
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1.2 Current M&A and Private Equity strategies<br />
of and appraise suggestions for improvement<br />
of current practices<br />
Suntory has earlier successfully acquired Beam Inc and is gaining positive<br />
results. This time the enterprise is planning to target a UK based company.<br />
There are certain factors which need to be considered by both the firms in<br />
the deal to avoid unnecessary issues and improve the performance<br />
(Cartwright and Cooper, 2012). Following are discussed some of the points<br />
which must be considered by Suntory and Distill before and after the<br />
acquisition -<br />
A risk management approach should be the foremost task for both the<br />
firms. There may be certain risks that are exclusive to both Suntory and<br />
Distill and may impact the functioning of the expanded firm. A consultancy<br />
can be hired to identify and manage risk associated with the market and<br />
business (Moeller & Schlingemann, 2005). Another important area is to<br />
evaluate the supply sources. Based in different countries, it is possible that<br />
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oth companies were sourcing from different suppliers. At present Suntory<br />
is not planning to move the manufacturing and the factory area, but it may<br />
expand it in the near future. So it is important that current suppliers must<br />
be checked to determine if they are ready to bulk material at low cost. It is<br />
recommended to identify new sources of supply in the international market<br />
to drive economies of scale.<br />
A change financial management program must be planned to help the<br />
acquisition deal go smoothly with the equal support of employees. Change<br />
management enable employees of both the organizations to accept the<br />
changes taking place in their job projects and the group they are working<br />
with. Change management becomes more essential for Suntory and Distill<br />
as firms are operating in different parts of the world (Hopkins, 2002). The<br />
culture, beliefs and values are altogether different. It is also possible that<br />
some employees from both sides resist changes as they are used with<br />
existing projects and groups. In this case, outside consultancies should be<br />
contacted to guide and support employees to accept changes.<br />
1.3 Evaluate the relative importance of the key<br />
elements in a successful M&A and Private<br />
Equity transaction<br />
There are key elements specific to every deal and organisation to support<br />
large transactions. The acquisition deal must be supported by predefined<br />
strategies and objectives, so that it results into overall improvements.<br />
Below are discussed some of the key elements that must be taken care of for<br />
the success of the acquisition deal –<br />
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Improve competitive behavior – Suntory is acquiring a brand which<br />
has its own established market on the global platform. Distill has its own<br />
product portfolio which has been developed through extensive research and<br />
development over the time period (Schuler & Jackson, 2001). Thus Suntory<br />
must develop those brands in its existing market, so that it earns more sales<br />
and profit. In addition to this, it distributes and market own products in the<br />
existing market of Distill.<br />
Transformation deal – The acquisition must not be limited only to the<br />
expansion of product portfolio and profit maximization. Rather, it should<br />
define strategies to transform the entire organisation and restructure its<br />
functions. This is important to charge and encourage the workforce to<br />
contribute towards the progress of the organisation (Hijzen, Görg &<br />
Manchin, 2008). Employees working under the same boss and on the same<br />
projects get bored and this is one of the reason they change employer. This<br />
can be controlled through acquisition deal through job rotation and change<br />
of work groups.<br />
Leverage economies of scale – Suntory after acquiring the Distill will<br />
require additional raw material and unfinished goods to support the<br />
requirement. This situation can be dealt by leveraging the economies of<br />
scale offered by existing suppliers. Other than this, new suppliers can be<br />
contacted who are in the establishment phase (Weihrich & Koontz, 2005).<br />
This will support the company to control the cost while producing and<br />
selling more at the same time.<br />
Reach new markets – The expanded firm must develop its goals and<br />
target new markets to establish competitive advantage and gain early share.<br />
The firm will have huge product portfolio to be offered to the new<br />
customers.<br />
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Develop Capacity – An important key success element for Suntory would<br />
be remove excess capacity which is not generating any revenue. On the<br />
other hand, it must also focus on expanding those business areas that are<br />
contributing to more revenue (Robinson & Harris, 2000). This way the new<br />
firm will be able to optimize the functions and operations.<br />
Global employee management – Human resources in present time are<br />
the most important part of the organisation, as they contribute effectively<br />
in the success and progress by leveraging the capacity of physical resources<br />
(Moeller & Schlingemann, 2005). The expanded Suntory after the<br />
acquisition of Distill should deploy employees at various global locations to<br />
further support in the business development.<br />
Task 2 Maximum price to pay & justify<br />
Recommendation<br />
2.1 Understand how to value a target company<br />
for an acquisition transaction<br />
An important part of the business valuation is its financial performance<br />
which reveals the result of the strategies and decision making ability of the<br />
management. The financial performance of Distill is evaluated with the<br />
help of annual results of last three years (Hijzen, Görg & Manchin, 2008).<br />
Below is provided a table that provides analysis of profitability and liquidity<br />
position of the company.<br />
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Table 1: Finance Performance of Distill<br />
Amount in GBP Million 2012 2013 2014<br />
Cost of Sales 77.27% 76.83% 76.09%<br />
Gross Profit 22.73% 23.17% 23.91%<br />
Operating Profit -9.45% -16.35 -15.26<br />
Net Profit -10.94% -19.5 -16.3<br />
Current Ratio 0.94 1.53 2.45<br />
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Receivables Turnover 3.92 4.89 5.56<br />
Inventory Turnover 7.72 8.37 8.61<br />
Fixed Assets Turnover 172.83 184.63 185<br />
Revenue %<br />
Year over Year -20 -17.36 -36.46<br />
3-Year Average -8.38 -23.08 -25.11<br />
5-Year Average 7.1 -1.55 -16.58<br />
10-Year Average 14.87 9.63 2.8<br />
Taking into consideration the profitability data, the table clearly shows that<br />
cost of revenue is tightly controlled and maintained in the last three years.<br />
This supported increase in gross profit over the same time period. The cost<br />
percentage was 77.27% in 2012 which improved and reduced to 76.09% in<br />
2014. The gross profit which was 22.73% in 2012, increased to 23.91% in<br />
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2014. So there is a direct relation between cost and gross profit of the<br />
company. Taking into account the revenue, it is going in the negative<br />
direction from last three years. The three year average was -8.38% in 2012,<br />
increasing to 36.46% in 2014. Five year average also reveals the same<br />
evaluation and is contributing to loss year over year. The 10 year average is<br />
again all time low (Rossi & Volpin, 2004). The operating profit although<br />
gains support from the cost and gross profit margins and has been<br />
improved slightly from last year, but are still in negative. Net profit of<br />
Distill was -10.94% in 2012 which increased to -19.5% in 2013, but<br />
controlled to -16.3% in 2014. This is supported by the improved operating<br />
margins and lower sales and administration cost.<br />
Read more about : International Human Resource Management<br />
Furthermore, the liquidity position of the company is improved despite<br />
negative profits. The current ratio as calculated through current assets and<br />
liabilities was 0.94 in 2012. The ratio improved to 1.53 in 2013 and to 2.45<br />
in 2014. The increase in ratio is the result of excess funds raised by Distill<br />
earlier in this year. A notable thing in this regard is that market forces are<br />
still positive about the future prospects of the company. Despite all time<br />
negative sales and profits, the ability of the management reveals in the fund<br />
raising (Slack, Comtois and McCalla, 2002). This excess cash has been<br />
raised to support the need for market expansion and product development.<br />
Thus Suntory will have both physical and human resources to leverage the<br />
benefits and gain through the ability and skills. The cost and sales aspect is<br />
also important and reveals the ability of the management in controlling it<br />
up to the certain level (Rigby & Bilodeau, 2007). This also shows the skills<br />
and contribution of the workforce which have been working towards the<br />
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progress and betterment of the organisation. In many case, when firms are<br />
moving to negative results, often shareholders and employees ditch at the<br />
first place.<br />
2.2 Critical analysis of comparative issues in<br />
M&A and Private Equity<br />
In business environment, huge deals that involve amalgamation of two<br />
companies are not isolated from issues. As both Suntory and Distill are<br />
based in different countries, it is likely that there were some issues that<br />
affect before and after the organisation functioning. It is thus essential that<br />
the management of both the organisations need to identify the issues that<br />
are existing and that may affect after the acquisition (DePamphilis, 2009).<br />
Following are discussed some critical issues that may affect the potential<br />
deal and the functioning in future –<br />
<br />
<br />
Culture – No two have the same type of organizational culture and<br />
behavior. Moreover, employees working with one organisation for long get<br />
used to it. Thus, it is here important that the management should decide on<br />
the continuation of the particular type of culture after the acquisition.<br />
Employee management – Another issue that may affect the business is<br />
the employee management style and leadership. Like organizational<br />
culture, there is also huge difference in the management style and<br />
leadership of both the organisations (Cartwright and Cooper, 2012). If<br />
these issues are not dealt carefully, it is possible that it affects the capability<br />
of the enterprise.<br />
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Recommendation for the deal<br />
The above strategic and financial evaluation of Distill carried out to judge<br />
the feasibility of the potential acquisition by Suntory. From the strategic<br />
analysis, it has been analyzed that despite poor financial performance year<br />
over year from the last four years, the management and the market forces<br />
are still positive about the company prospects. The shareholders and<br />
investors provided huge funds for the new projects (Moeller &<br />
Schlingemann, 2005). The decision making ability of the management<br />
proved successful and is resulting into improving sales figures and cost<br />
control. This justifies that future prospects of Distill look promising and<br />
will definitely generate results. Acquisition of Distill will provide Suntory<br />
with the expanded catalog that has built its brand image in the market.<br />
Along with this, the third party brand catalog will also add to the existing<br />
portfolio of Suntory (Rigby & Bilodeau, 2007). Apart from this, Suntory will<br />
also benefit from the skilled human force which is contribution effectively<br />
towards the progress of the company. In addition to this, Suntory will also<br />
gain from the existing market reputation of Distill. Both the companies are<br />
operating on the global level, but they have their own markets in which they<br />
have occupied huge and increasing share year over year (Hijzen, Görg &<br />
Manchin, 2008). Thus Suntory will be able to market its own brands in the<br />
existing and high performing markets of Distill.<br />
Conclusion<br />
From the above report, it can be concluded that acquisition of Distill by<br />
Suntory will proved to be beneficial for both the companies. The report<br />
provides a strategic and financial performance analysis of Distill from the<br />
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point of Suntory (Hopkins, 2002). Financial evaluation of Distill is based<br />
on past three year annual data. In addition to this, decision making ability<br />
of the management of Distill is also discussed which shows that despite<br />
negative performance, the skilled workforce is able to work towards the<br />
betterment of the organisation.<br />
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