6-7 pages

Running Head: FIRM ACQUISITION

FIRM ACQUISITION8

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Shane

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Regard jones

Introduction

As the precincts that bound businesses continue to expand on a daily basis, it has become important for companies everywhere to formulate and implement strategies that allow for expansion in areas outside of their homeland. The success of an acquisition duly depends on the long-term strategy set forth by the company in matters concerning foreign trade and the implications it has on its profits. International expansion can prove to be advantageous as it enables the company to distribute its goods and services on a global scale thus leading to the expansion of their market share. Even though the idea to expand is entirely profitable to the company, one has to take note of the fact that there are a number of risks and disadvantages that are associated with a foreign acquisition.

Firm Acquisition in the European Union

In the case that I was the head of US-based firm then the idea of acquiring a company that was within or outside the confines of the EU would not be a good idea. Most past acquisition cases have been known to impact the growth of the company with some making it slow down. There are a number of hazards or risks that can affect a company that deals with remote acquisitions. In the first case, there's always a sizeable danger of the organization's esteem being oversold. It is evident that different nations evaluate their companies using different methods which mean that when an organization is sold, then its key players will be offloaded. This leads to the creation of a gap in the customer relationship administration of the company. The same representatives may be tempted to take licensed innovation to other ventures thus lessening the overall esteem of the organization. (Harry G. Barkema, 2014). Companies in the European Union have been faced with the existing major-money based problem called the Euro Zone Problem. The changing of governments in a number of countries has led to political instability and a strong viewpoint on the uncertain future of any financial prospects. If a company is set to be acquired then it is important that all its assets become secured in order for it to efficiently carry on with its operations. The EU has a strict practice of freezing all assets belonging to individuals or companies. If a company is restricted from drawing cash from a bank then its value depreciates. It is therefore prudent to avoid any acquisition prospects in the EU. One can, however, go for companies in countries where such problems are non-existent. A good example is for a company located in the nation of Brazil which has a sound financial system, a 4.1% GRP rate and a strong currency (Culp, 2010).

Advantages and Disadvantages of Non-Acquisition of firms in the European Union

The main advantage with the choice made in not acquiring companies in the European Union is the cost incurred in the process. The expenses meted in the enrollment of a company in the European Union are about 15bn net Euros which translate to about 0.07% of the GDP. Such an enrollment expense and also the existence of insufficient policies cause the firm to provide high prices to consumers which are risky for them (Cengage, 2010). The European Union has over time insisted on the use of a single currency which has also caused problems for many companies and the acquisition of a company would lead to high rates of unemployment and also a low economic growth. Firm acquisition in a country like Brazil would definitely be a successful venture as it is a regional economic power. The company is riddled with natural energy, minerals and it also has a broad industrial base. The economic growth in the country is stable and the local market is growing by the day. The selection of Brazil as an investment opportunity is because of how it handles taxes, the state of inflation, strong consumer confidence and also excellent infrastructure.

Trading outside of the European Union also has its disadvantages as most companies in the EU have the advantages of harmonizing standards, reduced paperwork and easy enforcement of how people move from one European Union country to another. A country like Brazil has been known to have a political environment that is volatile. Its legal system has slow and difficult with bureaucracy being the movers and shakers in the country (Harry G. Barkema, 2014).

Advantages and Disadvantages of Acquisition of firms in the European Union

The advantages brought forth by the integration of companies in the European Union shouldn't be ignored. Being able to be part of the Schengen space whereby one is allowed to invest, shop or work anywhere in the European may have been viewed to be a phantasmagorical idea to most denizens in Europe but it has proved to be effective. The enlargement of the European Union has reaped many benefits for the member states with most having contentions economic and institutional reforms that include the deregulation and privatization of energy and utilities (Harry G. Barkema, 2014). The migratory flows in the European Union are unrestricted which allows for the citizens to move freely. The prices of goods are in a standardized state with a single market being created for the member countries. This allows for the products to evade the hassle of having to pay customs taxes to various authorities thus creating more and more employment opportunities for denizens.

The operation of the EU as a single market and subsequent formulation of common policies for member states has largely been viewed to cause a number of discrepancies. Rules that were formulated in order to protect smaller countries have been seen to affect larger countries and this goes against the general order of the EU. Wealthier countries are obliged by the order to share their wealth with smaller states which have caused ripples among the members. The European Union has also placed emphasis on the need for member states to convert to the use of Euro as a single currency. This has caused a major surge in unemployment rates and low economic growth. The implementation of free trade of labor can increase the immigration level in member states leading to the creation of pressure on the disbursement of public services. Most companies in the EU are encouraged to import goods from other countries as there are no tariffs incurred(Cengage, 2010). This leads to an increase in the number of imported goods causing an outflow of money in their economy thus creating a deficit on the payment balances. All these factors are important in the determination of whether it is safe for a company to venture into the purchase of a corporation in the European Union.

Investment Opportunities for MNC in Foreign Markets

A multinational corporation is able to invest in financial markets outside their home country with reasons revolving around transactional financial leveraging, taxes, exchange rates and also political changes. Most political environments desire the investment and provision of investment incentives by multinational corporations into their financial markets. The foreign exchange rates are used by most corporations in determining whether the transfer of currencies into the financial markets is favorable for the companies. The level of taxes on the local, foreign or domestic front can prove to be very profitable and it might ensure that the transfer of funds from one point to the other is inexpensive (Culp, 2010). Bilateral netting considerably minimizes credit exposures between counterparties through the distilling of any gross payments that occur during the changing of hands into lesser net expenses be it through the life of the contract or even after its termination (Culp, 2010). Multinational corporations in the United States must understand that there's a growing concern on market fluctuation on asset returns and also on the flow of cash on foreign entities. Having a one payment system will ensure that there is added security in the investment venture and the parent company's financial activity. All the factors considered in the investment should be pegged to another sovereign entity and also benchmarked according to their pros and cons. Any imperfections in the market flow have to be corrected during the process of arbitrage in order for the multinational corporations to feel stable and ensure that the market is efficient. Firms have to formulate stock portfolios that cover through the various European nations rather than having one that speaks to a single nation. The accessing of remote markets will enable Multinational corporations to spread their assets over an assorted business gathering that will be accessible on a local level (Cengage, 2010).

Provision of Credit to Foreign Markets by Financial Institutions

Financial institutions choose to offer credit to foreign markets with attribution to the fact that most developing markets provide access to any letters of credit, have a high credit rating and are creditable by nature. The European Commission, The Department of Treasury, Federal Trade Commission and the Department of Justice have all been tasked with regulating and approving any international mergers. Whenever these supranational and national organizations approve mergers, they send notifications to organizations and financial institutions with regards being made on the credibility of the new organization (Harry G. Barkema, 2014). Firms that are controlled and managed by their bilateral counterparty are exposed by the use of credit enhancements that either reduces the potential loss exposure in the case of a default occurrence or even the likelihood of one dealing with a counterparty that is highly risky. Developing markets have a tendency of having multinational corporations that are credible due to their financial analytics and practices. Investors also tend to offer credit to markets outside their own countries due to low-interest rates and expectations in exchange rates. Some countries stock up large supplies of funds that are made available whenever one needs them. This causes low-interest rates in loans and therefore ensures that the borrower is satisfied. Countries will low interest rates are often expected to have low rates of inflations which creates an upward pressure on the value of their currency in foreign countries (Harry G. Barkema, 2014). There is no precise explanation to the relation between currency movements and inflation differentials conversely so some borrowers can choose to borrow from nominal interest rates based markets.

Conclusion

The problems faced by the member states in the European Union are sure cautionary tales on the implications of an active venture in the union and how they might affect the practices and undertakings of a multinational corporation. Even though most successful enterprises rely on taking risks and tolerating their insatiable appetite for success, it is important for them to make strategic decisions on which ventures are profitable in the long run. Having an analytical viewpoint on the competitive position held by the company against the main dimensions involved in globalization will guide and define the most suitable approach needed in the formulation and implementation of a globalization strategy.

References Cengage. (2010). Investing in International Financial Marketing. The Internation Financial Environment. Culp, C. (2010). OTC-Cleared Derivatives: Benefits, Costs, and Implications of the "Dodd-Frank Wall Street Reform and Consumer Protection Act". Journal of Applied Finance, 103-129. Harry G. Barkema, F. V. (2014). INTERNATIONAL EXPANSION THROUGH START-UP OR ACQUISITION: A LEARNING PERSPECTIVE. Academy of Management Journal, 41.