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The President of EEC recently called a meeting to announce that one of the firm's largest suppliers of component parts has approached EEC about a possible purchase of the supplier. The President has requested that you and your staff analyze the feasibility of acquiring this supplier. What information will you and your staff need to analyze this investment opportunity? How will you go about making the decision? Discuss and evaluate the different techniques that could be used in capital budgeting decisions. Which do you think EEC should use? Why?

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The President of EEC recently called a meeting to announce that one of the firm's largest suppliers of component parts has approached EEC about a possible purchase of the supplier.

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To analyze the feasibility of acquiring the supplier, I will need several pieces of information to make a sound decision.

First of all, we will need to evaluate the potential synergies arising out of this acquisition, such as those related to reduction in operational costs due to greater control over the value chain, operational synergies due to combined infrastructure, resources, management strength and knowledge base of the two entities, economies of scale and greater control over the market.
The company should also evaluate the potential synergies between the culture, goals, objectives and work systems of two companies. It will need to analyze whether EEC will be able to integrate the operations of the supplier with those of the parent company after the acquisition. All form of synergies should be comprehensively evaluated in order to make the correct decision.

We will also need to evaluate the importance of this acquisition from strategic viewpoint. For example, we will need to gather information pertaining to strategic advantage obtained by the company against its competitors by having more control over the value chain which will happen due to acquisition of the supplier. We will need to check how this advantage will turn into competitive advantage in terms of boosting the top line revenues of the company.

Strategic impact of an acquisition can most easily be assessed by deciding to treat the strategic impact as an element of financial value, asset value or resale value -- but this requires making some very specific assumptions.

Market impact is the effect that combining your company with the target will have on market behaviors. For example, reducing the number of competitors may decrease price competition, increasing margins for the remaining competitors. A combined company may also generate higher value for customers by offering a ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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