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Section Page No

0.1 Executive Summary 3

1.0 Financing the acquisitions 4


1.0 Methods of financing

2.0 Proposed option & Application 5

3.0 Issues of foreign exchange 7

4.0 Recommendations 14

5.0 References 15
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Ôhe report presented below sheds light on the investment appraisal of Bear Ôrading
PLC. As a part of the report the first section of the paper throws light on the various
methods of acquisitions like cash offers, share for share and many more are
analysed. Ôhe second section of the report sheds light on the various points of
consideration which must be kept in min d if the firm is looking to do business at the
global level. Ôhe third section talks about the various recommendations and the
methods which are used by the firms in order to reduce the foreign exchange risks.
And finally a conclusion is given telling abou t the firm¶s decision to globalise.
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As per Mclaney, E (2003) the trends leading to increase in various elements like
globalisation, technology developments, liberalization has lead to more competition
in the firms. Ôhis competition has made it very difficult for the firms to be financially
sustainable in the market. As a result the firms which have healthy financial
sustainable system acquire the smaller or even the larger firms than its own size.

According to Watson et al (2007) every acquisition or merger has the financial


implication associated with t he firm with which it is associated with.

Also it has been observed that most of the financing acquisitions usually use a cash
method or share for share method of acquisition.

However when the acquisitions in various businesses in the past 30 years are bei ng
analysed it can be observed that in 1990¶s the trend was towards the share for share
method while now it is shifting to cash offers since past 6 -8 years (Watson et al,
2007).


 
 



 
 

Cash Offers

Share for Share Offers

Vendor placing and Rights Issues

Mixed bids

Security packages:


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One of the most widely and frequently used method for making financing acquisition
is cash Offers (Watson, D and Head, A., (2007)).

As a part of this method the company looking forward to acquire the other firm
makes cash offer to the share holders of the firm to be targeted. Ôhis offers proves
out to be attractive for the share holders of the targeted firm as it provides them with
a compensation in order to sell the shares.

Secondly, if cash offer is made to the targeted firm in that case the ordinary shares
does not get affected and hence therefore the earning per share or the ownership
structure is least affected.

Ôhe offer is also beneficial for the bidding company as it giving the rough
approximate to the firm that how much it needs to offer in order to acquire the firm.

Also, as per (Myers Stewart C, (2000); Richard, A (2000)) it beco mes a bit difficult for
the bidding firm to arrange a huge amount of capital from the financial institutes in
order to acquire the target company.

Ôhis problem is usually faced by the firms which have high value of the gearing ratio.

Also if the interest levels are very high the gearing ratio of the firm also gets affected.

In case the firm borrows a large amount of cash in order to raise capital the
acquisition may be regarded as leveraged takeover.


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Acquisition of RJR Nabisco by Kohlberg, Kravis and Roberts (KKR)

In the year KKR acquired a comparatively much larger company than its own size
named as RJR Nabisco. Ôhe worth of the takeover was about U.S. $ 25 billion and in
order to acquire the firm KKR financed the tr ansaction by borrowing and issuing junk
bonds.
 


 
 

As per this method of acquisition the bidding company offers a certain fixed number
of shares. Ôhe bidding company may also give an offer to exchange shares for
shares (Mclaney, E. and Atrill, P. 2002).

Ôhe benefit of this transaction for the shareholders of the targeted company is that
they will still have the so called equity interest in the firm which they invested initially.

It has been found in the long run this method of a cquisition turns out to be more
expensive than the cash offers method of acquisition (Mclaney, E. and Atrill, P.
2002).

Ôhe reason why this offer turns out to be expensive is that the share prices might be
less attractive due to uncertainty associated with them during the stage of acquisition
and in return the company has to issue comparatively more shares. Also, the
process of issuance of new shares may also lead to dilution of control of the
acquiring firm.

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Ôhis is a method of acquisition in which the offer is made to the shareholders of the
targeted firm that they have an option to retain their shareholding rights. However the
firm bidding also needs to make its access to the financial institutes in order to pay
cash to the share holders of the targeted firm which are not interested in maintaining
their shareholder rights.

Ôhe vendor right issue plays a very similar role the only difference being instead of
offering/ providing shares to the investors of the targeted firm the shares are being
offered to the target firm itself.

In case if there are any shares which are left and are not being taken away by the
target company in that case the shares are usually placed with some institutional
investors.
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A. Debentures:-

Debentures can be described as a legal term which can be used for secured loan
stock (Pike and Neal, 1999). It can be found that debentures are used by the firms
when they need to raise a large sum of capital for investmen t and other purposes.

In the process of acquisition the problem which the acquisition company faces is that
the share holders of the target company might not accept their bonds.

Ôhe chief reason for this being that the purchase of shares involves high risk and
high returns and the share holders might not like to exchange these shares for bonds
which involve low risk and low returns.

On a positive side if the bonds are issued the earning per share of the share holders
would not reduce and also the interes t payments are tax efficient.

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Issuance of Preference shares is one of the less common method of acquisition


which is being used by the acquisition firms.

Ôhe chief reason for this being the shareholders feels that the preference shares are
comparatively less flexible than the ordinary shares.

Another important consideration associated with t he preference shares is that its


payments are made after tax.

Also, the ownership aspects and the security of the cash offer is not made in
preference shares.


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According to Pike Richard, (1999) mixed bid method of acquisition gives share for
share option as well as provides cash option as well. Ôhis is one of the most widely
method of financing acquisition which is being followed within United Kingdom.

Ôhe chief reason why this method is very famous is that the shareholders of the
targeted firm has an option that they can either choose shares in the acquired firm or
get the cash in return of their share which suits their tax positions and liquidity.

As per the law applicable in United Kingdom if a firm is doing merger or an


acquisition at least 30% of the shares of the company which is targeted must have a
cash offer and must have the highest price paid by the target company¶s share over
the period of last twelve months (9 th Rule, City Code on takeovers and Mergers).

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As already being advised the best possible financial acquisition method which the
Bear Ôrading Plc must opt for is the mixed bid. Ôhe method is proposed as it gives
an option to either grant the shares to the share holders of the target company or to
pay as in cash.

As a result of this method the Bear Ôrading Plc need not to make complete payment
through cash and will help the firm to keep its g earing ratio low as well.

Also, since the firm would not raise all the shares that means the firm will also need
not to dilute the value per share.

Also, the firm must keep in mind that it need pay the highest price attained for the
value of share in the p ast 12 months.

Also in order to provide the cash to the target firm the BRC trading Plc needs to
raise capital for the transaction. As a result of this the firm needs to keep in mind the
various methods of raising funds which are available to it. Some of the methods
which the firm can use in order to make finance available to itself includes: -

Issuing of Shares

Issuing of preference shares

Issuing of Loan notes

Debentures
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Use of Profit

Ôhe proper mix of the above stated options must be used as if the f irm borrows too
much capital from the bank in that case the firm will have to pay equally high rate of
interest as well. Also the firm must try to use most of its profits made through the
previous years as this will reduce the pressure on the firm to pay b ack this capital.

It has also been mentioned that the firm is supposed to pay the cash alternatives in
the Euro¶s this emphasis that the BRC trading Plc might also need to sort out the
issues which arise from the foreign Exchange transactions (Cox David a nd Fardon
Michael, 1997).
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à Since Bear Ôrading PlC would be dealing with foreign currency so it is


supposed to be bit more careful than it needs to be doing business just in its
own national borders.
à Ôhe chief reason for this being the foreign currency transactions are more
volatile in nature this is because they involve variability in terms of exchange
rates.
à Ôhe countries which have unbalanced economies usually have volatile
exchange rates (Businesslink, 2009) and business are more prone to financial
losses.
à However in certain countries such as U.S. there is no problem in importing or
exporting finance from the country but it becomes important to declare the
bonds, money orders if their value exceed more than (Mold, 2006) US $
10,000.
à Also the financial transactions made will also be more prone to Ôransaction
risks. Ôhe transaction risk means the delay in the time which is usually caused
between the time when the firms enter into contract and the time whe n they
make payments for it.
à Also, it is to note here the foreign transaction risks may have the positive or
negative impact depending upon the fluctuation in the currency rates of both
the countries.
à Also, the international businesses are more prone to competitive risks since
the firms gain more profit because of high risks associated with the
transactions and it helps in bringing the cost down in the longer span of time
(Card, 2002).
à Since the firms are taking high risks it also helps in the better econ omic
stability and better returns from the foreign countries in the longer span of
time.
à In order to reduce the exposure to immense risks in the business transactions
the firms use a strategy named as HEDGING. Hedging in a broader term can
be explained as a method of insuring against the price of the product.
However hedging helps in reducing risks like currency fluctua tions, interest
rates and price of the commodities.

Ôhe various options which are being developed in the business environment in order
to reduce the exposure resulting from the foreign exchange includes: -


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Ôhe currency option will help the firm to get a right to purchase or sell a particular
currency at a specified exchange rate and for a specified period of time and tha t also
with no obligation.

If Bear trading PLC follows this method then it can help the firm in gaining the
benefits through the exchange rate changes.

Ôhe major disadvantage of this method is that these options have expiry dates and
they need to be purch ased every time.

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Also, as it is being mentioned that the firm uses Euros as a mode of payment to its
global investors as well. Say if the firm is planning to invest in country where euro is
not used in that case the firm will need to meet all the expenses in say Indian rupees
and then again convert all the revenues earned in Indian Rupees back to Euro this
will lead to wastage of a lot of firm¶s money in the transactions. In order to save this
money and also to reduce the risk of foreign exchange it is advised that BRC Ôrading
PLC must open its bank account in the country where it is investing. Ôhis will help
the firm to meet all its expenses from the money which will be deposited in that bank
account from the revenues earned by selling its products.

At the end of financial year if the firm wants it can convert all its profits in the bank
account which is in Indian Rupees into Euros.

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Ôhis is the method which is usually followed by the smaller companies as it helps the
firms in getting maximum flexibility. As a result of this method the firm can purchase
or sell a currency at any time of the day which will help the firm to make the
transaction when it feels like the currency exchange rate is feasible.

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Ôhe currency forward can be described as a method of hedging which allows the two
trading firms to exchange the specified amount of currency at a set and pre -
determined exchange rate in future.

Also, the currency forward contract is not ve ry flexible and it involves high cost
associated with itself. Second issue with the currency forward contract is that since
the contract is just between two parties in that case the contract cannot be sold in
the secondary market.
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Ôhe future contract is however an exchange from a specified authorised dealer. Ôhe
major advantage which it has over the forward contract is that it can be sold in an
open market at any time however it is not possible to do the same with the future
contract.

However the major negative point associated with it includes that it involves high
cost in the form of commission and it is very hard to get a good rate of exchange.


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IÔ is very essential that Bear Ôreading Plc must initially plan carefully in which
country it wants to do business in as due to recession the economic growth is very
less in many countries of the world.

After Bear Ôrading Plc h as chosen a country it becomes very essential to choose a
company which has similar values as that of Bear Ôrading Plc as otherwise it will
become very difficult for Bear Ôrading PLC to inculcate new values in the staff after
acquisition the chief reason for this is it will be very di fficult for the staff to go through
this change.

Ôhen it becomes essential for Bear trading PLC to examine the performance of the
targeted firm critically.

Ôhen once the decision to acquire the firm is made then it becomes important that
the Bear Ôrading Plc chooses the best method of doing financing acquisition.

It is advised the firm must opt for a tactical approach in order to carry the acquisition
process smoothly.

IÔ is also essential that Bear Ôrad ing Plc makes a note of all the legal requirements
required in that country and then fulfil them carefull y at each level of acquisition. Also
the method followed should not involve a lo t if cash as the firm is looking forward to
go global and do some more acquisitions in the other countries as well.

Ôhe firm must also consider the other factors also very carefully which are very
essential for smooth operations. Ôhis includes political risk, taxation, gearing and the
currency risks.

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After analysing the financial position of the firm and the amount of capital required to
raise in order to make the investment it can be stated that BRC Ôrading Plc may take
its foreign investment plans ahead. But it is also very essential for the firm to keep
the changing trends in the business environment and e conomic factors in mind.

Also while going through the expansion stage it is advised the firm must follow the
above stated method of acquisition as it will lead the firm to more sustainable
financial development.

Now after analysing the above submitted repo rt it becomes very important for the
board of Directors to make a decision that what percentage of money should be
raised from which method of raising fund and also what will be the best mix of cash
and shares which must be raised and will be helpful for t he firm in its future
strategies as well.
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