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Two Potential Targets
The company in question, Caracal Light Ammunition (CLA), faces two serious issues that are associated with shipping and tool manufacturing. The company produces a wide range of small arms ammunition (About us, 2014). According to the survey results, that the company buys raw materials from distant suppliers. The materials often need additional precautions and conditions for shipment, which results in increased costs. The survey implemented also shows that some shipping companies refuse to deliver such freights, which forces the organization to look for other partners, which is associated with the investment of additional time and funds.
It is possible to note that the company heavily relies on organizations providing shipment services. Therefore, it is important to consider the acquisition of a shipment company that would satisfy the needs of the organization. This will decrease the costs of logistics and will ensure that the organization will provide its products to the customers promptly. It will also reduce the company’s reliance on foreign companies which is important for risk reduction.
Another significant factor contributing to the increased costs is the tool manufacturing process. According to the survey, the company purchases a number of tools and details from other manufacturers, which makes it reliant on partners’ timely shipments, quality control and so on. However, CLA can consider acquiring a small tool manufacturer that could produce the most vital details and tools to decrease the dependence on suppliers. Such acquisitions will lead to significant financial synergies as the company will reduce costs as well as mitigate possible risks associated with the supplier’s power (DePamphilis, 2015). These two target companies will help CLA implement an effective acquisition and improve its performance.
Description of the Potential Targets
It is possible to consider each of the potential targets in terms of certain theories and synergy valuation models. Thus, differential efficiency theory can be used to analyze the shipping company acquisition. The theoretical framework focuses on the benefits of both companies (Piesse, Lee, Lin & Kuo, 2013). Thus, CLA will optimize its logistics and reduce costs. At that, the target company should be small and privately owned to make the acquisition beneficial for both. Privately-owned companies are more flexible in terms of their corporate culture, standards and so on. This is beneficial for the acquisition process.
According to the survey results, CLA needs rather limited shipment services and, if the target company is big it will be unable to work to its full capacity, which will lead to slippage, redundancy, decreased profit and bankruptcy. It should also be a local company as the acquisition of an international company is associated with large turnover and significant investment that is not available in this case (Yeo, 2013). Applying the diversification hypothesis, it is important to make sure that the target company can satisfy CLA’s needs in shipping particular materials. This theoretical approach focuses on the minimization of risks (Piesse et al., 2013).
As for the other target company (tool manufacturer), it is necessary to apply differential efficiency theory, which will also allow choosing the most appropriate target company. It should also be small to ensure benefits for both organizations (Piesse et al., 2013). The survey helped identify some peculiarities of the company including the fact that CLA has quite limited funds, and it cannot invest in the acquisition of a big manufacturer. Moreover, there is no need in that as a small manufacturing company can have the necessary capacity to produce the most important tools and details.
It should also be a local company that will minimize logistics costs and contribute to the development of the local market. This is also consistent with the diversification hypothesis, (Piesse et al., 2013). CLA will minimize the risks associated with partners’ failure to deliver the necessary details within the necessary terms. In the case of the tool manufacturing company acquisition, it is also possible to apply the information hypothesis (Piesse et al., 2013). CLA and the target company can share information, which will be beneficial for their operations. The companies may develop new strategies to optimize the production process.
Since both target companies are similar (they are both small local privately owned), it is possible to apply the net present value model to evaluate the effectiveness of both acquisitions (Fiorentino & Garzella, 2014). The companies are small local and privately-owned, which means the acquisition costs will not be too large. At that, it will result in the minimization of risks and costs, which will lead to an increase in profits of the company. Hence, the acquisition of these companies will be efficient.
It is necessary to note that the two target companies are similar and, hence, associated with similar synergies. Thus, expenses reduction is the potential synergy that will occur in both cases. CLA will be able to optimize its internal positions and develop more efficient operations (Daft, 2015). Importantly, shipping has been associated with frequent additional expenses due to the unavailability of some partners. Company’s own shipping solutions reduce costs. Production of some tools instead of purchasing them from other suppliers also minimizes costs.
Processes optimization is another crucial synergy associated with the acquisition of both target companies. The logistics will be improved significantly, and the production chain will not be disrupted. First, all raw materials will be delivered timely, and all the necessary tools will be available whenever needed. The efficient production chain will allow CLA to provide more products to more customers as well as develop proper relations with partners.
The financial economy can also be a potential synergy associated with the acquisition of both target companies. As has been mentioned above, both targets are local organizations. Local businesses are often subsidized by the government. The investment into local businesses will make governmental subsidies possible for CLA. It is necessary to add that these outcomes will lead to the development of the company as they need comparatively small investment.
Furthermore, self-reliance is another crucial synergy that will arise. The company will be more flexible, and some of the needs will be satisfied without addressing suppliers. This is also associated with on-time delivery saving penalties.
Finally, one more synergy expands the boundaries of the company’s benefits as the acquisition of local companies will have a favorable impact on the development of the country’s economy. The acquisition will result in the creation of jobs for local people and their empowerment. The industries and services sectors will also be affected as the new facilities will employ people who will develop their skills and knowledge.
As has been mentioned above, the target companies should be local to increase the potential synergies. Since the major facilities of CLA are located between Abu Dhabi and Dubai, this is the region where the target companies should operate. The shipping firm, Expert Future Cargo, is located in the UAE (Expert Future Cargo, 2015).
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It has been acknowledged that the target companies should be small in size. The recommended firm is quite small, which means that it can satisfy the needs of CLA and will have the necessary load. The shipping firm may need certain investment as some raw materials need specific conditions when transported. At the same time, Expert Future Cargo has a significant fleet that includes vehicles with specific features (refrigerators, for example). The company can deliver freights from other countries, which is crucial as some materials are provided by companies located outside the region mentioned above. The target company will be also integrated into the delivery chain if necessary. The company is privately-owned, which will make the acquisition process easier. It will be easier to integrate the firm in terms of the culture.
Execution Plan for the Acquisition
It is possible to highlight major elements of the execution plan for the acquisition. Clearly, it is crucial to develop a detailed acquisition plan with the evaluation of its effectiveness and outcomes for both CLA and the target company. First, it is important to develop a working group that will plan and implement the acquisition process. The team will execute a comprehensive analysis of the backgrounds of the target companies and will estimate the particular benefits of the acquisition. The next stage in addressing the target company and start negotiations on the matter. It is important to highlight all the positive outcomes for the target company.
According to the survey, the entire acquisition process should be implemented within 2-3 years. This is sufficient time for the acquisition as the target company is rather small. The comparatively short acquisition period will help the companies achieve synergies quicker. During this time, the negotiation process, exit plan development, structured marketing process, purchase agreement, and the integration will be carried out. This will be possible due to the peculiarities of the target company that is small and privately-owned.
Thus, the first year will be devoted to negotiation and exit plan development. The target company will come up with tax plans and reinvestment options. It is noteworthy that the acquisition will be associated with the full sale. Structured marketing procedures will be implemented during the same year. The purchase agreement can be signed during that period as well.
The second-year will be the start of integration procedures. It is important to make sure that all the employees of the target company are aware of CLA’s background, its vision and mission, its corporate culture and so on. A series of training courses should be provided to the target companies’ employees. It is essential to pay specific attention to standards and regulations existing at CLA. This stage may need significant investment as training as well as the introduction of some technologies used at CLA may be needed. This is especially concerned with IT. As has been mentioned above, the change of some equipment may be necessary to meet the specific needs of the company. It will be important to integrate the company effectively into the production and supply chain. Since the company is small, local and privately-owned, the acquisition process will be quite short.
As far as the synergies are concerned, they can be expected during the first years after the acquisition, while some of them can be achieved earlier. The cost reduction synergy will arise during the integration process and will be substantial during the first year after the completion of the integration process. The company will successfully mitigate various risks that tend to lead to additional costs.
The synergy associated with the process optimization will arise later as the company will have a period of integration, which can have some difficulties (development of proper communication channels, the use of software and so on). Financial synergies will be achieved after the second year after the integration completion. The company is quite small, and large financial outcomes should not be expected.
Nevertheless, such synergies as self-reliance and flexibility will be substantial and will be achieved during the first year after the integration completion. CLA will reduce its reliance on foreign suppliers, which is important for risk reduction. The company will not depend on shipping companies and their availability. The synergies associated with the development of the industry and especially local communities will arise soon after the news concerning the acquisition. The acquisition is the sign of growth and development, which will create the corresponding ideas in the society.
Local people will be assured that they will have their jobs. As has been mentioned above, the acquisition will lead to the introduction of new jobs as the target company is likely to expand as CLA will be able to invest in its development. Therefore, it is clear that the acquisition of the target company will be beneficial for all stakeholders involved since it will lead to several synergies within a comparatively short period. It is noteworthy that the acquisition will lead to the development of the company, the target firm, the community as well as the entire industry.
About us. (2014). Web.
Daft, R. (2015). Organization theory and design. Boston, MA: Cengage Learning.
DePamphilis, D. (2015). Mergers, acquisitions, and other restructuring activities. San Diego, CA: Academic Press.
Expert Future Cargo. (2015). Web.
Fiorentino, R., & Garzella, S. (2014). The synergy valuation models: Towards the real value of mergers and acquisitions. International Research Journal of Finance and Economics, 124, 71-82.
Piesse, J., Lee, C., Lin, L., & Kuo, H. (2013). Merger and acquisition: Definitions, motives, and market responses. In C. Lee & A. Lee (Eds.). Encyclopedia of finance (pp. 411-419). New York, NY: Springer Science+Business Media.
Yeo, H. (2013). Geography of mergers and acquisitions in the container shipping industry. The Asian Journal of Shipping and Logistics, 29(3), 291-314.