(Source/ Cases in International Finance pp.136-145)
International business can lead an active company into many complex areas of management. Investment in a number of overseas locations is a demanding process involving divergent conditions and expectations. From a management perspective there are strategic issues in maintaining businesses which are consistent with corporate objectives and focused on core strategies. These are critical concerns to insure that overseas involvement also is directed at achieving maximum revenue potential with minimum financial inefficiency. A large number of international operations and investments require exceptional control over financial operations, accounting, costs, financing and debt arrangements and foreign exchange exposure.
“The Far East Trading Company” case illustrates the complex issues of international investment and financial operations. As a long established Swedish trading company, the firm had accumulated very diverse businesses in Southeast Asia, China and Latin America. As a company operating from a currency basis of Swedish krona there were special financial issues. The complexity of operations provided challenges of focus and consistent business and financial management. Funding activities required extensive use of U.S. dollar debt and Asian currency exposure. Revenues and expenses had multiple sources. The company’s concentration of activities in the rapidly growing markets of Asia also made it responsive and vulnerable to regional difficulties. The Asia currency and economic crisis which merged in 1997 and persisted for several years provided extremely demanding challenges to the company’s financial strategies and management.
This stressful situation provided examples of corporate requirements in key area of international finance which are very relevant for our interests.
The case focuses on the following principal elements:
1. Investment Strategy
2. Revenue Generation
3. Financial Management
– Accounting/ financial control
– Foreign Exchange Exposure
While the case highlights the central corporate issues for the company, the perspectives and requirements of the numerous overseas subsidiaries are of great interest as well.
The case will be examined by a group with specific responsibility for reporting to the class. The review will be expected to involve a comprehensive powerpoint presentation including verbal reports including each member of the group for a total of at least 30 minutes. A written report will be expected as well. The case is also available as an Individual assignment and for non-reporting Groups.
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Class members not assigned to the working group or writing an individual report will be expected to have a thorough knowledge and interest in the case and participate actively in discussions during and after the presentation. The class will work to resolve viewpoints into the most effective analysis and recommendations applicable to the case situation
The team should address the following:
1. Investment Strategy/ Functional – review the company’s investment in a large number of business areas. Comment on the advantages/disadvantages especially from a financial perspective.
2. Investment Strategy/Regional – review the company’s involvement in a number of very different geographic regions. Advantages/disadvantages?
3. Base Currency – what are the special issues involved for a company with a small currency basis (Swedish krona) in a U.S. dollar denominated world, especially given its multi-currency involvement?
4. Financial Management – review the potential issues involving funding requirements and revenue streams from very different businesses – such as the fixed investments in the meat business in South America and the dairy business in china vs. the trading businesses in Southeast Asia and others.
5. Business Distribution – evaluate the financial results in 1995-96 (Exhibit 2). Do you agree with the company’s conclusions on Core and FTC Businesses?
6. Financial Results – evaluate 1997 results and compare to 1995-96. Comment on the firm’s financial status and trends prior to the strains of the Asia Currency Crisis. How was the company positioned financially for the forthcoming difficulties?
7. Financing – focus on the company’s extensive involvement in local currency exposures (non-US $). What were the financial implications of the generation of revenues in many Asian currencies? What were the implications of debt in those currencies?
8. Financing – evaluate the decision to rely on U.S. $ debt. Comment on the tradeoffs between lower financing costs on foreign exchange exposure.
9. Asia Crisis – financial management is especially important in periods of economic difficulty. The company’s exposure in many markets made it sensitive to more crisis situations. Examine the negative impacts of the Asian crisis on the company’s financial position from the viewpoints of investment, operational and translation perspectives. Comment on the company’s reaction to these negative impacts.
10. New Strategic Approaches – viewing the company’s many issues suggest the optimum strategies for Investment, Debt Management and for Foreign Currency Management (reflecting the dilemmas confronting the CFO at the end of the case).
Comment on the potential of these strategies for financial management by the many subsidiaries.
11. Evaluation – grade the company’s performance in managing its financial issues in the period under review.