O n l i n e A s s i g n m e n t H e l p

Charlotte Alexander

This is a solution of business

establishment Assignment in

which we discuss Developing

business financial and strategic

performance.

Business Establishment Assignment

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Introduction

With the liberalization in trade policies, there are increasing number of new

business establishments taking place all over the world. In many countries

where initiation of new businesses communication by foreign companies is

not easier; entrepreneurs adopt different other routes like acquisition,

mergers, joint ventures and foreign institutional investments. In respect

with this aspect, the following report is carried out to evaluate the

feasibility and profitability of the acquisition of a liquor brand. The firm

aiming to acquire is Suntory which is established in Japan, while the target

business Distill is based in UK. The objective of the report is to analyze the

financial and strategic performance of Distill in terms of profitability and

sustainability.

About Suntory

Suntory is engaged into brewing and distillation since 1899 and is

considered as one of the oldest in the alcohol industry. The enterprise also

produces soft drinks and sandwich as part of its expansion. Suntory jumped

onto international platform and became one of the largest distillation

beverages with the acquisition of Beam Inc in 2014.

About Distill

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Blavod Wines and Spirits plc is engaged into production and marketing of

owned and third party brands across the world. The firm changed its name

to Distill in 2014 in order to reflect the nature of the business. The previous

company was result of the merger between Blavod Black Vodka and

Extreme Beverage.

TASK 1

1.1 Value creation and the success of an M&A transaction

The acquisition of Distill is not only for the purpose of business and market

share expansion. It equally requires sufficient strategies to support the plan

and deliver desired results. Suntory can also develop the existing Distill

brand and focus on leveraging the benefits from the existing projects.

Trust – It is essential for the management of both the brands to develop

trust among themselves, employees and customers to support in managing

operations post acquisition. This is important, so that existing and

profitable projects of Distill remain as usual (Rigby & Bilodeau, 2007).

Trust among the employees is also an important factor in the success of the

acquisition to retain skilled employees.

Common goals – The acquisition deal will succeed when the goals and

objectives of both the companies are similar for the long term aspects

(Weihrich & Koontz, 2005). Difference in the overall goals will impact the

functioning and operation of the larger firm.

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Cost control – The acquisition deal will certainly require huge investment

in various areas. So it is important that Suntory will control cost and

eliminate excess capacity. Business areas in terms of physical and human

resources not leading to effective results must be identified and evaluated

for cost purpose (Robinson & Harris, 2000).

Improved market share – Suntory will definitely benefit from the

existing market share of Distill. It is essential for the expanded firm to

maintain the brand image and reputation with the stakeholders to avoid

any unwanted issues (Slack, Comtois and McCalla, 2002).

Research & Development – An important success factor for Suntory

will be the acquisition of human skills and abilities from Distill (Rossi &

Volpin, 2004). The expanded firm can utilize this for R&D and other

important business areas.

Competitive advantage – It is also important for Suntory to continue

maintain the competitive advantage developed by the Distill. Any lost

competitive advantage would hamper the position of Suntory in present

and future (Weihrich & Koontz, 2005).

Combined synergies – The acquisition of Distill will enable Suntory to

gain from the exclusive products and service areas owned by Distill.

Efficient use of employees’ capacities – The expanded larger firm will

increase the number of employees allowing the business to restructure and

utilize full potential of the human force (Slack, Comtois and McCalla,

2002). Existing employees of both the firms can be shuffled and placed into

new groups and projects.

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1.2 Current M&A and Private Equity strategies of and appraise suggestions for improvement of current practices

Suntory has earlier successfully acquired Beam Inc and is gaining positive

results. This time the enterprise is planning to target a UK based company.

There are certain factors which need to be considered by both the firms in

the deal to avoid unnecessary issues and improve the performance

(Cartwright and Cooper, 2012). Following are discussed some of the points

which must be considered by Suntory and Distill before and after the

acquisition -

A risk management approach should be the foremost task for both the

firms. There may be certain risks that are exclusive to both Suntory and

Distill and may impact the functioning of the expanded firm. A consultancy

can be hired to identify and manage risk associated with the market and

business (Moeller & Schlingemann, 2005). Another important area is to

evaluate the supply sources. Based in different countries, it is possible that

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both companies were sourcing from different suppliers. At present Suntory

is not planning to move the manufacturing and the factory area, but it may

expand it in the near future. So it is important that current suppliers must

be checked to determine if they are ready to bulk material at low cost. It is

recommended to identify new sources of supply in the international market

to drive economies of scale.

A change financial management program must be planned to help the

acquisition deal go smoothly with the equal support of employees. Change

management enable employees of both the organizations to accept the

changes taking place in their job projects and the group they are working

with. Change management becomes more essential for Suntory and Distill

as firms are operating in different parts of the world (Hopkins, 2002). The

culture, beliefs and values are altogether different. It is also possible that

some employees from both sides resist changes as they are used with

existing projects and groups. In this case, outside consultancies should be

contacted to guide and support employees to accept changes.

1.3 Evaluate the relative importance of the key elements in a successful M&A and Private Equity transaction

There are key elements specific to every deal and organisation to support

large transactions. The acquisition deal must be supported by predefined

strategies and objectives, so that it results into overall improvements.

Below are discussed some of the key elements that must be taken care of for

the success of the acquisition deal –

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Improve competitive behavior – Suntory is acquiring a brand which

has its own established market on the global platform. Distill has its own

product portfolio which has been developed through extensive research and

development over the time period (Schuler & Jackson, 2001). Thus Suntory

must develop those brands in its existing market, so that it earns more sales

and profit. In addition to this, it distributes and market own products in the

existing market of Distill.

Transformation deal – The acquisition must not be limited only to the

expansion of product portfolio and profit maximization. Rather, it should

define strategies to transform the entire organisation and restructure its

functions. This is important to charge and encourage the workforce to

contribute towards the progress of the organisation (Hijzen, Görg &

Manchin, 2008). Employees working under the same boss and on the same

projects get bored and this is one of the reason they change employer. This

can be controlled through acquisition deal through job rotation and change

of work groups.

Leverage economies of scale – Suntory after acquiring the Distill will

require additional raw material and unfinished goods to support the

requirement. This situation can be dealt by leveraging the economies of

scale offered by existing suppliers. Other than this, new suppliers can be

contacted who are in the establishment phase (Weihrich & Koontz, 2005).

This will support the company to control the cost while producing and

selling more at the same time.

Reach new markets – The expanded firm must develop its goals and

target new markets to establish competitive advantage and gain early share.

The firm will have huge product portfolio to be offered to the new

customers.

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Develop Capacity – An important key success element for Suntory would

be remove excess capacity which is not generating any revenue. On the

other hand, it must also focus on expanding those business areas that are

contributing to more revenue (Robinson & Harris, 2000). This way the new

firm will be able to optimize the functions and operations.

Global employee management – Human resources in present time are

the most important part of the organisation, as they contribute effectively

in the success and progress by leveraging the capacity of physical resources

(Moeller & Schlingemann, 2005). The expanded Suntory after the

acquisition of Distill should deploy employees at various global locations to

further support in the business development.

Task 2 Maximum price to pay & justify Recommendation

2.1 Understand how to value a target company for an acquisition transaction

An important part of the business valuation is its financial performance

which reveals the result of the strategies and decision making ability of the

management. The financial performance of Distill is evaluated with the

help of annual results of last three years (Hijzen, Görg & Manchin, 2008).

Below is provided a table that provides analysis of profitability and liquidity

position of the company.

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Table 1: Finance Performance of Distill

Amount in GBP Million 2012 2013 2014

Cost of Sales 77.27% 76.83% 76.09%

Gross Profit 22.73% 23.17% 23.91%

Operating Profit -9.45% -16.35 -15.26

Net Profit -10.94% -19.5 -16.3

Current Ratio 0.94 1.53 2.45

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Receivables Turnover 3.92 4.89 5.56

Inventory Turnover 7.72 8.37 8.61

Fixed Assets Turnover 172.83 184.63 185

Revenue %

Year over Year -20 -17.36 -36.46

3-Year Average -8.38 -23.08 -25.11

5-Year Average 7.1 -1.55 -16.58

10-Year Average 14.87 9.63 2.8

Taking into consideration the profitability data, the table clearly shows that

cost of revenue is tightly controlled and maintained in the last three years.

This supported increase in gross profit over the same time period. The cost

percentage was 77.27% in 2012 which improved and reduced to 76.09% in

2014. The gross profit which was 22.73% in 2012, increased to 23.91% in

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2014. So there is a direct relation between cost and gross profit of the

company. Taking into account the revenue, it is going in the negative

direction from last three years. The three year average was -8.38% in 2012,

increasing to 36.46% in 2014. Five year average also reveals the same

evaluation and is contributing to loss year over year. The 10 year average is

again all time low (Rossi & Volpin, 2004). The operating profit although

gains support from the cost and gross profit margins and has been

improved slightly from last year, but are still in negative. Net profit of

Distill was -10.94% in 2012 which increased to -19.5% in 2013, but

controlled to -16.3% in 2014. This is supported by the improved operating

margins and lower sales and administration cost.

Read more about : International Human Resource Management

Furthermore, the liquidity position of the company is improved despite

negative profits. The current ratio as calculated through current assets and

liabilities was 0.94 in 2012. The ratio improved to 1.53 in 2013 and to 2.45

in 2014. The increase in ratio is the result of excess funds raised by Distill

earlier in this year. A notable thing in this regard is that market forces are

still positive about the future prospects of the company. Despite all time

negative sales and profits, the ability of the management reveals in the fund

raising (Slack, Comtois and McCalla, 2002). This excess cash has been

raised to support the need for market expansion and product development.

Thus Suntory will have both physical and human resources to leverage the

benefits and gain through the ability and skills. The cost and sales aspect is

also important and reveals the ability of the management in controlling it

up to the certain level (Rigby & Bilodeau, 2007). This also shows the skills

and contribution of the workforce which have been working towards the

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progress and betterment of the organisation. In many case, when firms are

moving to negative results, often shareholders and employees ditch at the

first place.

2.2 Critical analysis of comparative issues in M&A and Private Equity

In business environment, huge deals that involve amalgamation of two

companies are not isolated from issues. As both Suntory and Distill are

based in different countries, it is likely that there were some issues that

affect before and after the organisation functioning. It is thus essential that

the management of both the organisations need to identify the issues that

are existing and that may affect after the acquisition (DePamphilis, 2009).

Following are discussed some critical issues that may affect the potential

deal and the functioning in future –

Culture – No two have the same type of organizational culture and

behavior. Moreover, employees working with one organisation for long get

used to it. Thus, it is here important that the management should decide on

the continuation of the particular type of culture after the acquisition.

Employee management – Another issue that may affect the business is

the employee management style and leadership. Like organizational

culture, there is also huge difference in the management style and

leadership of both the organisations (Cartwright and Cooper, 2012). If

these issues are not dealt carefully, it is possible that it affects the capability

of the enterprise.

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Recommendation for the deal

The above strategic and financial evaluation of Distill carried out to judge

the feasibility of the potential acquisition by Suntory. From the strategic

analysis, it has been analyzed that despite poor financial performance year

over year from the last four years, the management and the market forces

are still positive about the company prospects. The shareholders and

investors provided huge funds for the new projects (Moeller &

Schlingemann, 2005). The decision making ability of the management

proved successful and is resulting into improving sales figures and cost

control. This justifies that future prospects of Distill look promising and

will definitely generate results. Acquisition of Distill will provide Suntory

with the expanded catalog that has built its brand image in the market.

Along with this, the third party brand catalog will also add to the existing

portfolio of Suntory (Rigby & Bilodeau, 2007). Apart from this, Suntory will

also benefit from the skilled human force which is contribution effectively

towards the progress of the company. In addition to this, Suntory will also

gain from the existing market reputation of Distill. Both the companies are

operating on the global level, but they have their own markets in which they

have occupied huge and increasing share year over year (Hijzen, Görg &

Manchin, 2008). Thus Suntory will be able to market its own brands in the

existing and high performing markets of Distill.

Conclusion

From the above report, it can be concluded that acquisition of Distill by

Suntory will proved to be beneficial for both the companies. The report

provides a strategic and financial performance analysis of Distill from the

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point of Suntory (Hopkins, 2002). Financial evaluation of Distill is based

on past three year annual data. In addition to this, decision making ability

of the management of Distill is also discussed which shows that despite

negative performance, the skilled workforce is able to work towards the

betterment of the organisation.