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Importance of Valuing and Acquiring Start-up and Research Companies Major companies should always be looking to acquire appropriate start-up or research companies. Appropriately, this is common practice among the best, world-class companies. There are several major reasons why this policy benefits major companies':
â€¢ It reduces risk. 'The major company avoids the need to invest in the most risky, basic research, and can instead focus on ideas that have already demonstrated preliminary success.
It provides access to new ideas. As any corporate research group inevitably develops special expertise in specific areas and activities, it also develops "blind spots" to various new ideas that may be desirable. These can be obtained by buying promising new groups - which is a way to recruit effective innovative teams within the company'.
â€¢ The new technologies provide valuable options on future developments. They position the company to have access to new products and processes if they are needed, but do not commit the company to major investments until there is a proven market or use. These concepts are widely documented through extensive reports by professional's expert in the area.
2.Concepts for Valuing Start-up and Research Companies
Start-up and Research opportunities should be valued as options - not by the traditional Net Present Value (NPV) or Discounted Cash Flow (DCF). This is fundamental. The truth of this perspective has been widely documented by economic and finance research and practice. For a major company, acquiring a start-up is conceptually equivalent to buying a financial option:
â€¢ For a relatively small price (compared to an investment in full development), the major company gets the "right but not the obligation" to invest in later stage development in case the circumstances are favorable. This is equivalent to buying an option on the stock market, where the price to acquire an option on an asset is much less than the cost of the asset itself.
â€¢ If the circumstances are favorable, the option may be immensely valuable, and the major company can invest further to develop the asset. This is equivalent to exercising the option by paying the "strike price" to acquire the full asset. This strike price is generally expensive - but is undertaken only when the gain is known to be very much more, and is almost without risk.
â€¢ If the circumstances are not favorable, the major company does not go into full development, and losses nothing further than the relatively small cost of buying and maintaining the option. Again, this is equivalent to letting a financial option expire if it is never in the money and worth exercising. In the sense described above, acquiring a start-up is an option in the same way that a lease on a potential petroleum reserve is an option. This analogy has been widely examined in the economic and petroleum industry. Indeed, the value of a lease on a potential field is evidently very different from its discounted cash flow - since a potential field has little if any cash flow. The important point is that start-up and research companies should be valued as options.
The proposed method is a process that provides a check-list of important information that should be included in a proposal to top management, such as that prepared for the Ford Motor Company The process includes an important set of financial calculations, but these are only part of the process. It features a transparent decision analysis, coupled with a financial options analysis -- to the extent this may be appropriate. This part of the process is called a "hybrid real options analysis" - hybrid because it combines methods, applying each one only where it is relevant to do so.
The process goes through these steps:
1. Verify the technical promise of the proposed start-up - this is crucial as the information available is often biased or otherwise misleading.
2. Define the Technical Gap this technology fills within the acquiring company, that is, what are the specific capabilities this technology will provide, which the company does not have, and anticipates that it will need. This is what will make the acquisition particularly valuable - and will give the company a reason to pay the winning price to acquire the target company.
3. Identify the major scenarios that give value to this option. Investment in a start-up, as in any other option, should be done with a recognition of the circumstances that will make the option valuable and worthy of further investment.
4. Quantify the probabilities associated with these scenarios. In other words, how likely is it that the new technology will succeed technically, and that it will also be economically worthwhile for the acquiring company
5. Quantify the financial benefits and costs associated with each of the important scenarios. This consists of the standard financial analysis for these situations, calculated according to the standard process for the company.
6. Include the financial option evaluation if and where appropriate. To the extent that any of the scenarios results in the production of assets that are traded commercially, it may be possible to calculate and use a standard financial options analysis for these portions. However for many technological assets, such circumstances will not arise.
2.1.Factors in Place Location:
Businesses setting up shop face such factors as basic material cost, infrastructure setup, business services, labor, government, customer/market, supplier/resources, and competition. The success of internationalizing a business is undeniably tied to the setup of the manufacturing plant. Many traditional industries in London have moved towards setting up plants in another country to take advantage of and gain a competitive edge using its availability of cheap labor and raw material, but many of these businesses have not seen the profit margins they originally expected. Why is this so this is a question worth investigating. The goal of this study is to discuss the factors that should be considered when businesses are looking to setup plants in either in London or another country so to provide a reference for them in this process.
2.2 Factors in Plant Location:
When a manager decides to setup shop in a country, how should he evaluate quality and quantity? When a company sets the main production plant in a country that lacks a basic utilities infrastructure, the frequent and unexpected power outages caused by an inadequate power system may frequently shut down the production line. This ultimately harms the company's productivity, lead time, inventory quality, production cycles, etc. Since the establishment of a basic utilities infrastructure is crucial to the operation of a plant, companies will look for this when considering locations. Basic material cost, infrastructure setup, business services, labor, government, customer market, supplier resources, and competition. This study uses these eight factors as the foundation in formulating hypotheses.
2.3 The Study's Hypotheses:
The factor of initial plant location will ultimately influence the decision of which country the plant ultimately resides in; specifically, it determines whether the plant will be located in London or near to London. Generally, if company policy leans toward low manufacturing costs or being close to stable markets, then the company will prefer to setup shop in London. On the other hand, if the company stresses labor quality, infrastructure setup, and business services, then the company will prefer other country. Similarly, if the company wishes to participate in government policy on financial and tax issues, then it will prefer to be in Another country. Lastly, if the company is sensitive to its competitive status, then it will prefer to be Another country in order to closely monitor and learn from its neighboring competitors.
The following hypothesizes:
H1: Companies that emphasize factors in basic material cost prefer to locate a plant in London rather than in another country.
H2: Companies that emphasize the existence of an infrastructure setup prefer to locate a plant in another country rather than in London.
H3: Companies that emphasize business services will prefer to locate a plant in Another country rather than in London.
H4: Companies that emphasize labor factors will prefer to locate a plant in another country rather than in London.
H5: Companies that emphasize stability of government will prefer to locate a plant in another country rather than in London.
H6: Companies that emphasize customer/market-related factors will prefer to locate a plant in London rather than in another country.
H7: Companies that emphasize the proximity of suppliers will prefer to locate a plant in another country rather than in London.
H8: Companies that emphasize their competitive status will prefer to locate a plant in another country rather than in London.
This study aims to achieve the following: 1) Discuss the types of overseas plants and how they increase competitiveness and 2) Investigate the factors that should be considered when setting up a plant, since the decision will ultimately affect the company's operational results.
3.1 Global Logistics:
The world economy has shifted from nation-based economies to region-based economies and is moving towards a global economic system. Under this development, management of production of goods is no longer confined to one area, and now leaps across the boundaries of countries and continents. The life cycle of a product, starting from the purchase of materials, to manufacturing, storage, delivery, sales, and even post-sales service and management of the product at the end of its useful life now necessitates support in the form of business logistics, supply chain management (SCM), and, more broadly, global logistics management (GLM). A global logistics management system is basically any product distribution or supply chain which crosses country boundaries.
3.2 Logistics Management:
Logistics management included support unit strategies and systems design for control of materials and storage and transport of finished products. Logistics is the part of the supply chain process that involves planning, execution, and control of product and services from the start to the point of consumption including the effective exchange and storage of related data in order satisfy the customers' needs. Additionally added that "logistics" is the management process between the two points of sales and production. Function-oriented business unit structures involve dividing a company into separate departments, and logistics processes are important interfaces which exist within all the different business units.
3.3 The Criterion of Plant Location:
Per actual observations, the most widely-employed method in displaying location quality is a tradeoff table which displays the different important variables. The motives and supporting factors of proximity to customers, climate, legal environment, and taxation are all assigned tradeoff levels and totaled using Composite scores. Specific and general applications in industry can be found within the following texts:. This method is relatively objective and the outcome often aligns with the user's preferences, location strategy and cautioned that relying too heavily on financial analysis leads to reset the location and undesirable answers when setting up additional production facilities. The global trade environment, new product systems, and the impact of new methods on the evaluation of plant locations. These scholars suggested that the current literature on the determination of plant location is too much limited to quantitative figures such as transport costs, foreign exchange rates, rent and labor rates, and ignores such qualitative factors as basic infrastructure, labor skill level, the legal environment of the local government, and proximity to suppliers.
4. Research Method:
Research Target and Questionnaire Design
The selected company in this study is a leader in another countries motorcycle manufacturing industry, which is considered a traditional industry. This study targeted the selected company's suppliers and other chosen companies who had recently established manufacturing plants in either another country or London. The Likert 5-point scale was employed in soliciting the manufacturers' objective knowledge.
4.1 Collection Method and Basic Information:
The questionnaires for this study were mailed to the suppliers of the selected company. A total of 142 copies were sent out, 51 was received back, and after additional contact 34 more copies were received for a total of 85 (60%). Out of the questionnaires returned, 19 were deemed invalid, so a grand total of 66 valid questionnaires were used. The sampling for this study consisted mainly of the suppliers for our selected motorcycle manufacturer.
4.2 Calculation Analysis and Discussion:
Logistic regression and the more commonly used multiple regressions both assume an existing cause and effect relationship between the independent and dependent variables and uses the various parameter calculations in the model to determine their correlation (positive or negative relationship). This study's analysis employs a dummy variable, with 1 representing a high relative model of entry (51%.100%) and 0 representing a low relative model of entry (0%.50%), which is very suitable for use in logistic regression. Additionally, in multiple regression, the independent variable's regression coefficient can be used to directly represent an independent variable's marginal effect on a dependent variable, but because the logistic regression model is not first order function, its independent variable coefficient (regression coefficient) can only be used to determine the direction of influence and not the marginal effects that an
Independent variable has on a dependent variable. In order to determine the marginal effect (probability),
It is necessary to substitute the independent variable coefficient in the equation.
P¼ˆYi=1¼‰=1/ [1+exp (-a-bXi)]
Yi is the dependent variable, Xi is the ith vector of the independent variable a is the intercept parameter, b is the regression coefficient vector
Since the probability value increases with the value of the independent variable in the equation P(Yi=1) =1/1+exp(-a-bXi), when the independent variable's parameter estimate value (regression coefficient) is positive it means that the factor in question has a negative impact on a company's decision to establish a plant in Another country. Conversely, a negative parameter estimate value represents a positive impact on the decision. In our model all variables are basically measuring the total impact of all variables.
5.Conclusion and Recommendation:
This discovery also validates the maturity of the motorcycle manufacturing industry in another country and the fact that suppliers tend to group together in close proximity. The electronics and machinery industries have especially achieved the highest level of effective development of its supply chain. Because of this, establishing a plant in another country will allow a company to quickly reap the benefits from its various suppliers. This conclusion makes clear that managers who locate plants in London have, as their main targets, local customers as opposed to regional or global customers. The main contribution of this study is its attempt to analyze the factors affecting the location of a plant in either another country or London, since actual studies of this kind, on a large scale, are rare. Plant size is another control variable that is perceptibly different when comparing another countries and London location plants.
Discoveries from the Study and Discussion:
In the future, regardless of a Another countries or London location in setting up plants, labor, suppliers, and customers and markets will be the ultimate drivers in the determination of location. This study provides concrete contributions in the area of operational strategy for managers of multinational corporations. While the world's businessmen are focusing their attention on London-tomorrow's "factory for the world," it is necessary to first understand its advantages, and when considering establishing operations there evaluate the aforementioned labor, supplier, and customer/market issues. Additionally, before establishing shop overseas, first have a clear plan of action. If it is just an initial exploratory investment, then an overseas plant is best, and the monetary investment should be moderate as to not bring down the parent business in case the investment does not bear fruit. As for environmental factors, plant size and the type of industry and product are considered to be important controlling factors in the establishment of a plant
Suggestions for Future Study:
Future study in this area should consider a dynamic systems approach, since London is obviously a rapidly developing market and to study it using a passive method is risking the data quickly becoming obsolete. In order for companies to obtain a continuous competitive advantage, a dynamic approach to research is necessary, but the considerations involve higher costs and the necessity of greater resources.