The case that would be analyzed for the purpose of this paper would be that of the Khemka family which established itself in Russia in the beer business. The paper would analyze the methodology through which they secured funding for this business venture of theirs and the rationale behind such a move on the behalf of the Khemka family. The Khemka family; had Indian roots and strong business acumen as could be seen through the success of their SUN brewery endeavor.
A trait common to all entrepreneurial family businesses who like the notion of being the “owners”- hence, the structure of the stock division was that of a dual class stock one. This structure refers to varying classes of stock-the varying classes have different voting rights, dividend payments, and other characteristics concerned with stock.
The Khemka family had class A shares and the public were offered B class shares. More than 70% shares by the family and since no treasury shares were sold; the complete control of the company was in the hands of the family. As a result of this division, the Khemka family had ten times voting rights that of the ordinary shareholders- this disparity was intentional on the behalf of the owners who wanted to retain majority of control of the company and at the same time take advantage of the capital provided by the IPO.
Therefore, it can be seen that the owners were working in their own interest This dual class system suited them perfectly as it allowed them to retain majority of control over the company while at the same time raising the required capital to fund the expansion, to repay the debt. The initial public offering was an effective way to raise capital and the company went on to issue 3, 809, 500 GDRs which were underwritten and bough by Morgan Grenfell and Company. The IPO also helped the foreign investors a streamlined method through which to invest in Russian-based SUN brewery. The net proceeds of the placement provided liquidity for one of the private placement investors and became a capital infusion for the company as well.
However, some view the dual class method as an unfair system as it allows a small group of shareholders to retain control while other shareholders provide a majority of the company. The dual class system affords the managers long-term and short term insulation from the market for corporate control. The entrenchment enjoyed by the mangers does however raise questions about their incentives.
A dual class structure also imposes restriction on the form of corporate control can take through the assignment to higher voting rights to the owners themselves. The Khemka family should choose the option of taking on a partner as the family would-be able to improve its position. The competitive position in Russia has become quite fierce therefore; the family has to make a quick decision. The decision is clearly in favor of taking on a partner as that would allow the company to consolidate its position, have access to funds, a person to a developed business dense and in fact would be able to provide the required business insight into the business’s operations.
The risks that are connected with investing in a foreign country are quite a few; most importantly the socio-economic and political country. The country has varying laws and regulations then the country of the native owner. In the case, it can be seen that the situation in Russia was quite different as the brewing capacity was established in order to meet local requirements. The capacity had been established long before and in fact, certain limitations had been imposed on the consumption of alcohol. The Khemka family had to therefore, produce and trade within these new regulations. In fact, when the Khemka family set-up the brewery organization, Russia was experiencing an economic reform which affected the trading capacity of the Khemka family’s business. The currency had devalued by a great deal and hence; the Khemka family was forced to rethink their Russian business.
The varying labor laws and even standards regarding the production standard cane go a long way in affecting a company’s operations. The same case was with the Khemka’s corporation in Russia’s beer consumption was amongst the lowest globally.
When the Khemka family first took over certain brewery companies; they were shocked to discover that the companies were only operating at about 30% capacity and the quality of the beer was quite low. An entire reformation was required in order to make the beer of international quality.
Before, investing the Khemka family had sought the advice of consultants and experts in order to make sure that those companies would be taken over would eventually produce profits for the company. Therefore, after a long drawn out process consisting or taking proper advice and reforming the brewery industry, the Khemka family was able to adjust their business standards to those of the Russians.
The actions taken by the Khemka family included offering shares to the public along with taking a 60% interest loan. Both of these measures secured the sufficient funds for the company-the loan was in fact structured on a basis of a repurchase agreement as other options were not available. The options are ones all carried by companies that experience growth and though , later on the liabilities amounted to a large number the liquidity crisis is experienced by all large companies. This form of raising capital was in fact quite necessary and imperative to the growth of the company and hence, was wise moves on the behalf of the owners. Later on, when the Luxembourg IPO took place, SUN became a vehicle for capital markets to invest in Russia proving the business behind these moves.
Works Cited
- McClure B. “the two sides of Dual-Class”. Web.
- Gompers, P” Incentives versus Control-An analysis of US dual class companies “Harvard Business School, 2008
- Villalonga B, Raphael A, “Sun Brewing” Harvard Business School, 2008