Introduction
The introduction of global markets has created intense competition, and this has encouraged companies to develop strategies to survive in the turbulent market. There is a need to develop products of high quality to capture the demand of many customers. Competition in the global markets has facilitated the need to have a variety of products to increase the sales volume. To achieve a strategic position in the global markets, companies have been required to expand their markets to other countries. This has created the need to establish strategic alliances with foreign companies (Neelankavil and Rai 219).
Aphax Company is a company that has adopted various strategies to dominate the international market. The apex company manufactures soft drinks, and it is based in Paris France. The company produces and markets a wide range of energy drinks in five Eurozone countries. The products of the company include: Flavor, Skipps, Booster, and Niace. Alphax also manufactures sports drinks such as Switzer, Ebezeer, and the Footer. The company has built its reputation by producing quality products that meet consumer needs.
Eurozone crisis
The unprecedented economic turmoil in the Eurozone has caused a lot of economic mayhem in member states. The Eurozone is indebted, and this has profound effects on the financial sector. Banks are not willing to lend companies in the Eurozone as a safety measure to minimize the effects of the economic crunch. Though member states have intervened to salvage the situation, the future situation cannot be evaluated. Many companies operating in the Eurozone have suffered immensely due to the crisis (Oxford 1-3).
The company has suffered severe losses because of the financial crisis in the Eurozone. In pursuit of a broad growth strategy, the company broadened its market coverage. The company has heavily invested in several European countries by setting up subsidiaries to reinforce the parent company. The subsidiaries have played a significant role in maintaining the growth of the company. Things have not been so soft for the company in the last three years after Europe was hit by the financial crisis.
Alphax soft drinks manufacturers operate in different European countries. These countries include Portugal and Spain. Additionally, the company conducts business in Greece and Turkey. The company has witnessed a slowdown in growth due to the impact of the recession that hit Portugal, Spain, and Greece. The company has recorded stagnated sales in the Iberian markets and declining revenues from the Spanish market segment. These events have crippled the operations of the company and the company now depends on the home market in France.
Besides the financial crisis, the company has also faced a number of challenges in the European market. These challenges have constrained the company leading to stagnated income and growth in the last five years. This has been caused by stagnated demographics, changes in consumer preferences, declining income elasticities due to growing income levels, and stiff competition in the soft drinks industry (Filippaios and Rama 59-60).
For the last three years, the company has been exploring various strategies to save company. A strategy committee was appointed to work on a number of strategies that were essential for the turnaround of the company. The strategy committee recommended three broad-based growth strategies for the company management. The recommended strategies include: Mergers, acquisition and setting up new subsidiaries in a country that is located outside the Eurozone.
Brazil economic overview
The Brazilian economy is rated as one of the fastest-growing economies in the world along with countries such as China and India. However, it has experienced turbulence to reach this status. In the 1980s, the Brazilian economy was among various economies in the world that were having heavy debts. The debt crisis caused an economic ripple effect that was responsible for the prolonged inflation. The economy stagnated and did not record any positive growth for a long time. By 1993, inflation had reached an alarming percentage of 2,851.3 (Oliveira and Nakatani 39).
During the same period, the Brazilian government developed measures to overcome the impacts of the debt. After the end of the military government in the early 1990s, President Lula’s government opted for a neoliberal program and subordinated economic growth fundamentals to address the economic crisis at that time. However, this approach was not successful because of it accelerated economic disintegration. This led to changes in macroeconomic policy that gave priority to taming “inflation, allowing free-floating, and generation of the primary surplus to avoid debt” (Oliveira and Nakatani 40). These changes reduced the external vulnerability of the Brazilian economy. This reduced foreign debt percentage and curbed inflationary patterns.
The reduced external vulnerability encouraged by the privatization of many state-owned companies and the emergence of other private sector companies led to a rapid structural change in the economy. Agricultural and services sectors expanded, and this had an effect on the expansion of export trade. This caused an increase in exports from 0.95 percent to 1.96 percent between 2000-2008. The Internationalization of some Brazilian companies and an increase in trade surplus have contributed to economic development (Baumann 34). Additionally, the opening of the Brazilian economy to external investments opened the economy to multilateral trade that instigated economic growth. This increased GDP from 13.6 percent in the 1990s to 21.5 percent between the years 2000 to 2008 (Baumann 33).
Why Brazil
The company, after analysis of various options, decided to choose Brazil because of a number of reasons. Brazil is one of the fastest-growing market economies in the world, and the company takes advantage of the opportunities available in the economy. Additionally, Brazil is one of the countries with clear foreign direct investment policies coupled with macro stabilization and political stability (Baumann 34). The Internationalization of the Brazilian “entrepreneurial group and the short term financial requirements in foreign currencies” presents the flexibility of doing business in Brazil (Baumann 43).
The management opined that the company needed to be present in Brazil before the next world cup to take advantage of the opportunity. Furthermore, Brazil has remarkable preferential trade agreements with various countries in Latin America and the world and, therefore, working within the economy would be advantageous to the company in that it would be easier to market the product to other Latin America while operating from Brazil (Baumann 42). The company also considered the costs involved in operating in Brazil and found that there are significantly lower transportation costs and similar demand structure that would enhance the growth of the business.
Selected strategy
The management has pursued a global strategy to expand the business to different markets in the world. The management chose Brazil as the potential market of expanding the market of energy drinks to ensure sustainability. The management adopted an acquisition strategy as the best alternative in reaching out to the Brazilian markets. This is not the first time that the company is undertaking an acquisition strategy. The growth of Alphax Company has been achieved through the regional acquisition of firms in the same line of business.
While arriving at this conclusion, the management based the decision on previous experiences about the acquisition. The management thought it was in a better position to execute the acquisition of a local firm in Brazil depending on company experience with such ventures.
It is observed that acquisition fits the overall company growth strategy in a number of ways. Alphax Company’s overall strategy requires the firm to initiate various ways of ensuring that the firm remains competitive in the market. Furthermore, the above strategy is compounded by another objective of achieving a strong and sustainable market leadership position through building firm synergies.
The acquisition is capable of sustaining the company through the provision of alternative measures that ensure profitable growth, and the production of quality products to meet consumer requirements. The acquisition is taken as the appropriate avenue through which the company will access the new market in a cost-effective way and make its presence felt as quickly as possible. This will guarantee profitability; hence the growth and sustainability of the company will be achieved.
Schincariol Company
The management has decided to acquire Schincariol Company’s soft drink unit after the Schincariol Company decided to divest from the soft drink business unit. This strategy was adopted after Kirin Brewery Company acquired the brewery unit of the company in 2011. The management saw this as a great opportunity for reaching the Brazilian market. Schincariol Company is one of the largest companies in the beverage industry in Brazil and competes favorably with giant market leaders in Latin America such as AmBev and Grupo Petropolis.
The company has been in business for more than 70 years and has established a market network for its energy and sports drinks in Brazil and Latin America. The company’s main plant is located in Sao Paulo, which is the source of economic growth in Brazil. Additionally, the company has manufacturing plants spread throughout the country and extensive distribution centers across the whole region and the United States. The well-known energy drink produced by Schincariol Company is Skinka. Skincare is a strong brand of energy drink and the brand is widely used in Brazil, Peru, Argentina, Bolivia, Chile, and Uruguay. At the time of negotiation of this acquisition, Schincariol Company had released another brand of an energy drink called fruits, into the market. The company identified Schincariol Company as a way of building a good reputation to reach the expanding Brazilian market.
Capital budgeting
Capital budgeting is an instrumental element in business planning, investment, financing and operation. The companies plan for the acquisition of valuable assets through capital budgeting. The capital-making process is a highly sensitive issue because it deals with large sums of money (Moles, Parrino and Kidwell 395). Analysis of acquisition capital budgets is a critical area of indecision. Capital budgets are strategic decisions that require large capital outlay and have to be prepared properly (Baker and Gary 193).
In the preparation of the acquisition project budget, various financial considerations have been applied. It is a company policy that project budgets that are over €0.5 million are approved and handled at the corporate level. Projects of Alphax Company are classified as either profit-generating or profit maintaining. An acquisition project that the company wants to undertake at the moment is a profit-generating activity. The company has allocated €70.5 million to the project. The strategic committee considered various underlying risks that the project is likely to face. The project budget provides adjustments in priorities during the implementation of the project as a way of accommodating changes that are be necessary to mitigate potential risks.
The project has been carefully reviewed by evaluating the payback period as a major way of dealing with the uncertainty of the project. The evaluation has been done by looking at the net present value, the annual rate of return, and the terminal rate of return.
The total sum of €70.55 million is dedicated to this project, and €48.2 million is dedicated to the purchase of the manufacturing plant from Schincariol Company. There is a total of seven plants that the company has decided to take over. The company is to spend an additional amount of €10.5 to refurbish and upgrade the plants to meet company specifications. A total amount of €0.25 million has been allocated to cater for incorporation and legal process for the registration of the company.
The costs of adjustments and operational change costs are estimated to cost €0.15. The development of new information technology systems and other technical issues is approximated to cost €0.1 million. The company has recognized that the takeover can cause retrenchment, voluntary early retirements, and other human resources issues. The company has dedicated €0.5 for compensations and other payments. Advertisements, public relations, and hiring and training have been allocated €10.5 million. In addition, €0.5 million is dedicated to covering costs related to logistics, audit, Signage, publicity, and other miscellaneous expense.
The management has agreed to finance the acquisition through a bank loan. The financial and economic crisis in Europe has resulted in a credit squeeze in the financial sector (Humel 1). The rates charged by banks on loan lending to companies have increased hence making the cost of credit inquiries. Furthermore, the banks have tightened credit conditions restricting the lending to fixed amounts of money (Hume 1). The management has decided to borrow from Brazilian banks.
Potential risks
The company management recognizes the fact the acquisition of the project is bound to be affected by some risks. These risks may be brought about by the uncertainties in project parameters such as cash inflows and outflow, annual net value, terminal values, and foreign exchange rates (Zhang, Huang and Tang 4558). The management also realizes that there are some risks that can be hedged and those that cannot be hedged. Therefore, the company is preparing for such eventualities with enthusiasm.
Foreign exchange risks that are likely to face the company are operational and market risks (Goldberg and Draft 49). To deal with foreign exchange risk, management has decided to focus on core business issues and challenges as a way of reducing the volatility of earnings and cash flows. This will reduce the likelihood of the firm experiencing financial distress as a result of the low cost of capital thereby guaranteeing access to credit in Brazil. The company will use derivative instruments to lower funding costs.
The company will use currency swap to hedge against exchange rate risks. Forward contract hedge derivative, a short time strategy, will be used to enable the company to purchase specified amounts of Brazilian dollar. Forward contracts will enable the company to hedge sales and purchase transactions allowing the company to settle its contracts within the time.
A natural hedge will be used to match cash inflows in Brazilian dollars. This will be done by adjusting the production levels to respond to fluctuation in the foreign exchange rates. This will allow the company to pay suppliers with the Brazilian currency the company will derive from sales of the energy drinks. The company identified credit risk as to the risk that the company will not hedge. The company realized that if other instruments fail, it will cause a loss to the company due to exposure to exchange rate risk (Fu Junhui, Zhang, Yao and Zhang 1071).
Currency swap
A hedging strategy was adopted to avoid risks in the long term during the running of the project. The aim of the strategy is to protect the project from the impacts of an increase in foreign exchange rates and increased interest rates. Additionally, the swap is designed to prevent the project from stalling and not defaulting during inflation.
Raw material hedge
Fruits will be the main raw material that will be used in the production of energy drinks. Fruits will be obtained from the farmers and company plantations. Agricultural production is robust in Brazil due to support that the governments extend to farmers through subsidies. Government support for agricultural production has expanded agricultural exports; therefore, there are possibilities that prices of agricultural activities are likely to rise in the future as local consumption competes with the export market. The company is prepared to hedge against price risk through futures contracts (Fu, Zhang, Zheng, and Zhang 1070). Future hedging will be implemented through contracts with farmers who will be the chief suppliers of fruits. Future contracts will prescribe future price agreements between the firm and farmers to tame the impacts of price fluctuations.
Pros and cons of the project
The project is aimed at regaining growth through expansion into global markets. Additionally, the project will enhance company profitability especially after three years of negative returns. Furthermore, the project will result in an expansion of the business portfolio thereby guaranteeing increased value to company shareholders. The project will enhance company sustainability due to increased profitability. The management has identified the large capital outlay as the only demerit of the project. The project will require a large capital outlay and this may negatively affect the operation of business units in Europe (Filipino’s and Rama 61).
Conclusion
With the emergence of globalization, companies have been encouraged to adopt strategies to overcome competition in the market. This has caused the need to develop new products to match the needs of customers. The management of Alphax Company has decided that the company should implement the project. This was decided after various strategic and high-level consultations on the feasibility of the project. The management has found out that the project is viable and guarantees company growth and sustainability. The attractiveness of the project location is also another factor that was considered when arriving at the final decision. The company acknowledges that the project is bound to be affected by a number of risks and; therefore, it has prepared for such eventualities.
Works Cited
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