Business Finance
Introduction
Riordan Manufacturing is plastic manufacturer that is operating in number of countries. The company has reported annual earnings of $46 million and it had revenue of more than $1 billion. This report discusses the situation if the company acquires another firm in the same industry in order to expand and further penetrate in the markets where it is operating. The report analyses the strengths, weaknesses, opportunities and threats of acquiring another firm in the same industry. The report also discusses about the effects of globalization on the financial decision as well as the impact of exchange rate and the risks that fluctuation in the exchange rate causes. Moreover strategies to mitigate exchange rate risk have also been discussed.
Strengths of each approach
The strength of acquiring a firm within the same industry is that it would further make the position of stronger (Tamer, 2009). Therefore the bargaining power of Riordan Manufacturing would become stronger and thus it would allow the company to have more control over suppliers and distributors.
Weaknesses of each approach
The weakness of acquiring the firm from the same industry is that it would not allow the company to diversify and the company would stay in the same industry and would not be able to built new skills.
Opportunities of each approach
With more bargaining power, Riordan Manufacturing would be able to capitalize on the opportunities prevailing in the industry in a better way. Moreover, with the improving economic conditions Riordan Manufacturing would be in a better position to capitalize the market.
Threats of each approach
The main threat of this approach is that it would hurt the company if the industry collapses. As with the decline in the industry, it would result in further decline of the firm and more losses for the company.
Effects of globalization on financial decisions
Globalization has affected financial decisions of the firms. With globalization, firms have started expanding to other parts of the world. One of the positive effects of globalization is that it has enabled businesses to expand in different parts of the world and now many firms have become multinational enterprises by operating in more than one country. Thus, the positive perspective of this is that businesses can capitalize on the opportunities in other countries as well.
The negative impact is that economies are more linked and this can be shown as the financial crisis has made a huge impact on the world economy and not only developing countries but even developed countries have suffered.
Factors that contribute to exchange rate risks
With firms operating in different countries, they have to deal with different currencies. Some of the major factors that contribute to the exchange rate risks are political situation and political stability of the country, economic situation and economic stability of the country, future prospects of the country, corporate governance etc (Levi, 2009).
Mitigating exchange rate risk
In order to mitigate the exchange rate risks, firms try different strategies. However one of the strategies is to hedge the position. If the company thinks that the currency would decline, then it could hedge its position so that it would be able to minimize its losses if the situation does not go what he believed (Allayannis, Ihrig, & Weston, 2001).
Conclusion
The report presented overall positives as well as negatives of acquiring a firm within the same industry. Moreover, the report also discusses about the strategies that the firm can adapt in order to mitigate the exchange rate risks.
References
Allayannis, G., Ihrig, J., & Weston, J. P. (2001). Exchange-rate hedging: Financial versus operational strategies. The American Economic Review, 91(2), 391-395.
Levi, M. D. (2009). International Finance Fifth Edition. New Jersey, Routledge.
Tamer, C. (2009). International business: Strategy, management, and the new realities. Pearson Education India.
