Financing alternatives for acquisition
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Having previously identified the location of its greenfield investment. ( The location I chose is CHINA)
Acme, a multi-billion dollar public MNE that is incorporated in the U.S., must next obtain external financing for its proposed overseas production facility.
It has been estimated that the acquisition will cost $500M and all funds will be secured in the U.S.
THE TASK AT HAND IS - to explain to this committee some of the financial aspects of this acquisition.
Deliverable: At the next steering committee meeting, you will provide a detailed presentation of the characteristics of the various external financing alternatives.
PLEASE Include the advantages and disadvantages of each.
PLEASE CONCLUDE Your report with a recommendation of which alternative (or combination of alternatives) should be used to finance the overseas investment.
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Solution Summary
Having previously identified the location of its greenfield investment. ( The location I chose is CHINA)
Acme, a multi-billion dollar public MNE that is incorporated in the U.S., must next obtain external financing for its proposed overseas production facility.
It has been estimated that the acquisition will cost $500M and all funds will be secured in the U.S.
THE TASK AT HAND IS - to explain to this committee some of the financial aspects of this acquisition.
Solution Preview
There are various financing routes available for Acme to invest in its expansion plans in China For our analysis, since funds will be secured in the US only, we are ignoring alternative financing schemes available in the foreign country such as special grants provided by development banks to set up operations in China or other local source of financing in China which are available to foreign enterprises like Acme.
Let us discuss these options, their merits and demerits one by one:
1) Fund Raising via IPO/ Public issue: One of the most common routes to raise funds for these expansion plans is to offer shares of the company to public via Initial Public Offer, if the company is not publicly held right now or via issue of additional shares or rights issue, if the company is already publicly traded. The major advantage of going to the stock markets to raise funds is that substantial amount of funds can be raised via this route by diluting the equity of the company in proportionate amount. Further, the cost of raising funds via this route is cheaper as well due to no obligation to pay interest on capital as investors become shareholders of the company and not lenders. IPO's are especially attractive for new projects when there is optimism in the economy and people are willing and excited to put money in the equity markets in expectation of higher returns. Most of the times, if the issue is strong and appealing, gets subscribed by the public and institutions with the help of investment ...
Education
- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
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