Question Tag: International Expansion

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  • 6 Marks

AFM – Nov 2016 – L3 – Q2b – International investment and financing decisions

Compare the advantages and disadvantages of setting up a subsidiary versus licensing for KK Chemicals and suggest ways to mitigate blocked funds risk.

KK Chemicals Ltd, an Accra-based manufacturer of paints, sells its products only in Ghana. Currently, the company wants to expand into other African countries. The directors are considering two options: setting up its own subsidiary company to manufacture and sell the products or licensing a company based in the host country to manufacture and sell the products.

Required:
i) Advise the directors on TWO potential advantages and TWO disadvantages to KK Chemicals of setting up its own subsidiary company to handle production and sale in the host country as against licensing a company in the host country. (4 marks)

ii) Suppose KK Chemicals elects to set up a subsidiary in the host country. Suggest to the directors TWO ways of dealing with the risk of blocked funds. (2 marks)

i) Advantages and disadvantages of setting up a subsidiary versus licensing:

Advantages of setting up a subsidiary:

  • Control over operations: KK Chemicals will have full control over production processes and product quality, avoiding potential issues that could arise from licensing.
  • Full earnings retention: The company will retain all profits from sales rather than sharing them with a licensee through royalties.

Disadvantages of setting up a subsidiary:

  • Higher financial commitment: Setting up a subsidiary requires substantial capital investment, which could limit available resources for other projects or force the company to take on debt.
  • Exposure to political risks: A subsidiary is more exposed to political risks such as expropriation, business interruption, or currency restrictions in the host country.
    (4 marks)

ii) Ways to mitigate blocked funds risk:

Blocked funds occur when a host country’s government restricts the repatriation of profits. KK Chemicals can deal with blocked funds by:

  • Intra-company transactions: Sell goods or services to the subsidiary, ensuring payment is made to the parent company.
  • Royalties and fees: Charge the subsidiary royalties for using KK Chemicals’ intellectual property or management services fees, which can be remitted to the parent company.
  • Offer management services to the subsidiary for a fee.
  • Give more loan (rather than equity) finance to the subsidiary for interest payment.
  • 20 Marks

CSEG – Nov 2018 – L2 – Q6 – Strategic alternatives, analysis and selection

Discuss the challenges and strategies involved in Franko Ltd’s acquisition of a Nigerian accounting software company.

Franko Ltd is a producer of accounting software for SMEs. The software is very easy to use, even for a layperson, and has significant functionality for the price level of GH¢4,959 per annum. The package includes all functionality to comply with tax payments, including income tax, (PAYE) and VAT, as well as creditor and debtor accounting and some customer relationship management functions. The firm also has an enhanced package that includes telephone support and free updates for GH¢499 per annum.

Franko Ltd has been very successful, and this has led the firm to expand internationally, after starting and developing a business over the past five years, mostly in Accra, Ghana. Franko Ltd has decided to expand into the African market and has chosen to enter the Nigerian market by acquiring a Nigerian accounting software business as an entry route into that market, as it is perceived to be different from the Ghanaian market.

Required:

a) Explain FOUR (4) challenges Franko Ltd may face in the acquisition. (8 marks)

b) Advise Franko Ltd on how to effectively address the challenges they may face in planning and completing such an acquisition. (12 marks)

a) Challenges Franko Ltd May Face in the Acquisition (8 marks):

  1. Performance Risk:
    • The target business may not perform as well as expected after the acquisition. Franko Ltd might face challenges in achieving the anticipated synergies and returns, especially in a market that is different from its home market.
  2. Cultural Differences:
    • The organizational cultures of the two firms may be incompatible, which can be particularly challenging in cross-border acquisitions. Differences in business practices, communication styles, and workplace norms between Ghanaian and Nigerian markets can lead to integration issues.
  3. Retention of Key Employees:
    • Key employees in the target firm may leave after the acquisition, which could result in a loss of critical knowledge and expertise. Retaining talent in the acquired company is essential for a smooth transition and continued success.
  4. Regulatory and Legal Challenges:
    • Franko Ltd may face regulatory and legal challenges in the Nigerian market, including differences in business laws, tax regulations, and compliance requirements. Navigating these challenges can be complex and time-consuming.

b) Strategies to Address the Challenges in Acquisition (12 marks):

  1. Comprehensive Pre-Acquisition Research:
    • The extent and quality of the planning and research Franko Ltd does before pursuing the acquisition will largely determine the outcome. Franko Ltd should conduct extensive research on the Nigerian accounting software sector to identify potential acquisition targets that align with its strategic goals. Engaging with experienced advisors, such as legal and financial consultants with expertise in cross-border acquisitions, can provide valuable insights and reduce risks.
  2. Friendly Acquisition Approach:
    • Any deal should be friendly, ensuring the cooperation of the target firm’s shareholders and management. Franko Ltd should understand the goals of the target’s existing owners and offer terms that align with their interests. This might include retaining key management personnel for a specified period post-acquisition to ensure continuity.
  3. Due Diligence:
    • Franko Ltd should perform comprehensive due diligence on the target firm. This process should cover financial, legal, human resources, and operational aspects, with a particular focus on cultural compatibility and market-specific risks. Understanding the organizational culture of the target firm is crucial, especially in a cross-border context, to anticipate integration challenges.
  4. Integration Strategy:
    • Post-acquisition integration is critical to the success of the acquisition. Franko Ltd should decide whether to maintain the acquired Nigerian firm as a stand-alone entity initially or integrate it incrementally into its operations. A phased integration approach can minimize disruptions and allow Franko Ltd to learn about the Nigerian market and business environment gradually.
  5. Communication and Change Management:
    • Effective communication and change management are essential during the integration process. Franko Ltd should ensure transparent communication with employees and stakeholders of the acquired company, addressing concerns and aligning everyone with the company’s strategic objectives.
  6. Regulatory Compliance:
    • Franko Ltd should work closely with local legal experts to navigate the regulatory and legal landscape in Nigeria. Ensuring full compliance with local laws and regulations will prevent potential legal issues and contribute to the smooth operation of the acquired business.

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