FM CaseStudyCFCFoodsCorp

8/8/2019 FM CaseStudyCFCFoodsCorp

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GRADUATE SCHOOL OF BUSINESS

UNIVERSITI KEBANGSAANMALAYSIA

ZCZC6303: FINANCIAL MANAGEMENT

CASE STUDY OF CFC FOODSCORPORATION

PREPARED BY:

MOHD FAHMI BIN ABD RAHIMZP00585

SHAMEEL ANUWAR BIN SAMSUDINZP00582NOORUL AMALINA BINTI MOHD DAUDZP00571MOHAMAD ZAWAVI BIN MUDAZP00575


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NOOR OSMERA BIN ABU HASSANZP00601

MERGER: CFC FOODS and MMD FISHERIES CORP

Introduction

Merger can be defined as two companies combine to form a

single company. It refers to the aspect of corporate strategy, corporatefinance and management dealing with the buying, selling and

combining of different companies that can aid, finance, or help a

growing company in a given industry grow rapidly without having to

create another business entity.

From the fact of the case, both companies are in the same line of

business. CFC Foods Co is a highly diversified food processing company

with eleven processing plant and eight whole sale distributors while

MMD Fisheries Corp is a large processor of fish and other seafood

product. Based on this fact, both companies are said to have a

horizontal merger of which being defined when firm in the same line of

business merged.

The primary motive of the exercise is to acquire an improved

financial position. It will later extend and merge the operation of both

companies which in turn will give opportunity to reap of the economies

of scale and putting their assets into maximization of utilization. It is

also assumed that with the merger and the trend of people consuming

more fisheries product, the evolved company will be able to capture


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higher market value and simultaneously increase its revenue. Synergy

of the company can also be achieved. With the merger, specialization

of activities can be done. The acquired MMD fisheries Corp can

concentrate and specialize only on the Fisheries division. This will give

other division or plantation to concentrate and specialize on other

frozen food or seafood production.

Analysis of Financial Statement

There are several conditions that have to be taken into

consideration in analyzing the merged data figure. Consolidated and

merged balance sheet is provided. Cash payment of twenty two million

five hundred thousand being paid as consideration. This is thirteen

times the value of MMD Corp as at 2003.

In constructing projection of revenue and cash flow of the

merged entities, several assumptions are being made. The first

assumption is the increase in revenue by seven percent. Being

conservative, although reduction of cast is expected as a result of a

merger, cost of sales remains constant as per ratio before the merger.

Similar assumption is being made for the operational expenses, as no

lay off personnel or management being expected. Income tax rate is

set at twenty five percent similar to Malaysian Tax rate.

Table 1: Forecast Revenue and Cash Flow

Forecast - Revenue and Cash Flow ofMerge Entity

2003 2004 2005 2006

Consolid

atedProject

edProject

edProjec

ted

Net sales 621,783 665,308 711,879761,71

1

Costs of sales 500,873 535,934 573,449613,59

1

Gross Profit 120,910 129,374 138,430148,12

0Operational and general expenses 96,112 102,840 110,039 117,74


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1

Operating profit 24,798 26,534 28,391 30,379

Other Income 2,708 2,979 3,277 3,604

Interest Expense 2,666 2,666 2,666 2,666Tax reduction charge due toinvestment tax credit 358 0 0 0

Income before tax and gains on saleof properties 24,482 26,847 29,002 31,317Provision for income tax excludinggains tax 12,611 6,712 7,250 7,829Net Income after tax excludingcapital gains and tax 11,871 20,135 21,751 23,488

Capital gains net of tax (53) 0 0 0

Total net income 11,818 20,135 21,751 23,488

add: Depreciation 9,100 10,100 10,300

Operating Cash Flow 29,235 31,851 33,788

Less gross retention for growth 26,700 14,000 19,000

Less: Dividend 6,000 6,500 7,000

Less: Long Term debt 4,800 3,900 3,900

Free Cash Flow (8,265) 7,451 3,888

Minimum Working Cash balance 13,500 13,500 13,500

Additional Fund 21,765 6,049 9,612Say - round up additional fundneeded 22,000 6,100 9,700

Data such as depreciation, payment of long term debt, gross

retention for growth and minimum working cash balance are given in

the article extracted in constructing the above table. From the table

above, in year 2004, it is expected that the company is having a

negative cash flow of over eight million, while additional fund of twenty

two million is being expected to be raised to cover its minimum

working cash balance.

As expected, in the next two years, the merged entity will benefit

from its operational efficiency where revenue increased and additional

fund needed to fund the minimum working cash balance reduced.

However, the management should be highlighted with the elements ofdividend payment shown on the table. They might want to consider

and study the idea of making dividend payment to shareholders. From

the table above, it shows that payment of dividend is quite significant

affecting the cash flow needed in their operation. Consideration has to

be made to concentrate first on ensuring stability by investing the fund


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available for distribution to shareholders, to improve and finance its

operation. This will result in lower amount needed to be financed

through debt.

There are two methods of financing the minimum working cash

balance; through debt and stock financing. Here, assumption is being

made for CFC Co to finance its requirement by raising long term debts

alternatively, following their treasurers proposition of raising it

through equity of thirty million by issuance of common equity for forty

ringgit per share.

Tables below defined its projected balance sheet of merge entity

for both alternatives.

Table 2: Balance Sheet position with debt financing


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Balance Shee

as at 31 Dec

Cash

Accounts Rec

Inventories

Table above shows the impact of financing through long termdebt. From the article, the management should consider the

compliance requirement of which the merged company have to

comply. The first compliance check is that the companys position of

the current ratio should not be less than two to one. From the above

table, with the injection of twenty two million in cash, the companys

current ratio is being improved to three to one position. This will

enable CFC Co to cover its operational expansion. The position above

also shows that there are reductions in the tangible net growth and

short term compliance but still in a good health condition.


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Table 3: Financing with common equity

Balance Sheeas at 31 Dec

Cash

Accounts Rec

Inventories

Total Current Assets

Plant & Equipment

Less:Depreciation

Table 3 above shows results from financing it through common

stock. This in tandem with the proposal put through by the treasurer.

Thirty million are being raised for a forty ringgit per share. All

compliance requirements are being fulfilled. Attached is the summary

of the two methods.

Table 4: Summary of compliance

Com


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The current ratio of the merged company just comply the

requirement. However, the situation improved as both debt and

financing activity created additional cash for the operation of the

merged company. The other requirements also show positive excess of

compliance. However, looking closely, the financing through equity

give better statistics. Therefore, the management should look and

study further the potential of financing through the equity.

Furthermore, the debt ratio of the merged company is quite high,

recorded at fifty two percent.

The management should also look into possibility of financing the

merger using other methods. The assumption made in the merged

balance sheet provided is that payment of twenty two million five

hundred thousand settled in cash. This has resulted in reduction in

their current assets drastically, of which affecting its ability to finance

its operation. Further studies to ensure win-win situation, i.e. half

payment by common equity and half cash, could be arranged. These

elements will help the merged company to have a healthy financial

position and simultaneously fulfill settlement to MMD Cos

shareholders. Their ability to improve efficiency, gaining economies of

scale and synergy will promise good return of investment. This will

entice the shareholders to take up payment for the merger in stock

option.

Other Considerations

Other than financing activities, the management had to consider

also some other factors which will affect the process and decision

making. The first factor is to get advice or consultation from the

expert. Consultation with investment banks, auditors or consultant

specialist in merger and acquisition activities will provide them with


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better analysis and review. All angles will be covered and therefore

minimizing potential oversight.

The effects on the management of MMD Co should also be

studied. It must be re-affirmed that good relationship already in

existence before the merger. Normally, merger activities will destroy

leadership continuity in target companies top management team. It is

therefore essential to ensure that good atmosphere being exercised

from top hierarchy to down liners. This is also to ensure that the

merged management does not face with any litigation issues.

The short and long term factors of business should also be taken

into consideration. In this case, it is presumed that the demand for the

product is going to improve by seven percent annually. As demand

increases, it is norm to concur that the price of the product remains

high. With the intention to reap this profit, the capital expenditure

budget normally increased to cope with new technologies and

machineries needed. This however, must be studied carefully. In long

run, as demand slowly swift below, the demand and supply effect will

later affect the long run revenues and profits. Payback period of each

project or capital expenditure must be watch carefully. Failure to do so

will result in company being in high debt ratio which later leads to

financial difficulties or bankruptcy.

Conclusion

Looking at a glance, the financial analysis does show that CFC Co

will benefit from the merger. However, a detailed study has to be

performed to ensure a comprehensive framework being made to cover

all relevant perspective. Organizational behavior, variables acquisition

experience, cultural differences are areas that need to be addressed as

well. On top of it, acquisition premium, bidding negotiation and process


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and due diligence exercise must be performed in ensuring the

objectives of the merger has been achieved.

Documents

FM CaseStudyCFCFoodsCorp