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FIN 370 Week 5 Team Assignment - Virtual Organization Strategy Paper


Virtual Organization Strategy Paper
Using the link on the Materials page, access the Virtual Organizations.
Select one of the Virtual Organizations. Assume that your selected organization is a
privately held company and that it wants to expand its operations. The organization is
faced with three options to expand its operations:
They can go public through an IPO.
They can acquire another company in the same industry.
They can merge with another organization.
Using the Internet, texts, Electronic Reserve Readings (ERR), and other resources,
prepare a 1,050-1,400-word paper in which you compare and contrast the three options
and make a recommendation as to which strategy the selected organization should choose.
Be sure to address the following in your paper:
Strengths of each approach
Weaknesses of each approach
Opportunities of each approach
Threats of each approach

Virtual Organization Strategy for Kudler Fine Foods


Kudler Fine Foods is a gourmet food company that sells a large selection of fresh ingredients and
the equipment to make a gourmet meal all in one location. There are 3 locations serving the San
Diego metropolitan area, each providing services from a European Style Bakery to a huge wine
selection. As of today, Kudler Fine Foods is a privately held business, but the company is
looking to expand operations because they want to become wealthly beyond their wildest
dreams. Today we will explore the possibilities of Kudler Fine Foods expanding and the best
way for the company to accomplish this goal. The strengths and weaknesses of Public trading,
mergers and acquisitions will be discussed, the opportunities that are advantageous for the
company and any possible threats to the corporation using any of the three approaches.

Strengths of an Initial Public Offering (IPO)


One of the first advantages of an IPO that a company will see is the increase in capital. Going
public allows a company to raise capital that can be used for various reasons such as working
capital, acquisitions, research and development, marketing and increasing equipment and
supplies. Kudler Fine Foods already has three shops, but going public would allow the
corporation to raise more capital to expand even further, opening additional stores. Additional
capital would also allow the company to hire additional personnel and increase store hours.
A second advantage of an IPO is liquidity. Once a company is traded publically, the shares have
a market value and can be resold (Taubman, 2001). One of the biggest benefits is the ability to
offer stock incentives to employees. Employees that are invested in the company they work for
tend to work more honestly and harder. An IPO also lends a bit of prestige. Public companies are
usually better known and more visible than privately owned and reaches a larger consumer
market.

Strengths of Mergers and Acquisitions


Merging or acquiring another like company is an option that should be considered as well.
Mergers and acquisitions can often lead to an increased value generation for the organization
(MapsofWorld, 2009). A shareholder value after a merger or acquisition would be greater than
the sum of shareholder values of the parent corporation. This succeeds in generating cost
efficiency by implementing economies of scale. As the parent organization increases the scale of
operations of the newly formed company increases. As output productions increases the chance
that the cost per unit of productions will decrease is are greater within the scope of the new
company. Mergers and acquisitions can also lead to tax gains and revenue improvement through
market share gain. The idea here is the joint company will generate more value than as separate
entities.

Weakness of IPO
An IPO contains many disadvantages. Once Kudler Fine Foods offers an IPO and the stock is on
the market, Kudlers will be required to file financial information with the Securities and
Exchange Commission (SEC). An enormous amount of paperwork must be submitted
periodically to the SEC. Investopedia.com also reports that the cost of complying with the SEC
is very expensive. This would also include the time lost by management and the process
associated with the IPO process. Information also may be revealed to the competition. New
wealth acquired by the company is shared with the public investors. Kudlers may also lose
control of the company to the outsiders whom own stock in the company depending on the
amount of stock the holders own. Kudlers owner would not be able to walk away from the
company for a specified period, so an IPO would not allow her to retire immediately if that were
her plan. An IPO involves many legal issues that could lead to a lawsuit against Kudlers owner
if all the company facts are not presented in the IPO process.

Weakness of Acquisitions and Mergers


Kudler Fine Foods may consider an acquisition or merger by a larger company but either an
acquisition or merger maintains some weakness in the deal. Teng reported that Research by
McKinsey & Company found a failure rate of 61 percent in acquisition programs, with failures
defined as not earning a sufficient return on the funds invested. Reasons for the failure were
mismatched companies, acquiring a company to boost the purchasing companies stocks. While
the purchasing stock may go up, it does not necessarily stay up then the acquisition did not
accomplish the desired results.

Opportunities of an IPO
The opportunities of taking Kudler Fine Foods public presents many challenges organizationally,
having to not only plan out the financial side but also the marketing end as well. Going public
presents Kudler Fine Foods to the entire marketplace, not just restricted to their local areas in
which they now occupy. They are going to be drawing the attention of traders as well as
investors which opens up entirely different avenues to venture down.
Going public allows Kudler many opportunities for growth and expansion supported by the
public marketplace, and provides them many ways by recapitalizing themselves through the
issuance of further stock, but also allows them more freedom to grow and expand; positioning
themselves into the global marketplace should they choose.

Opportunities of Mergers and Acquisitions


Mergers & Acquisitions allows for creating horizontal or vertical business alliances which can
bring rapid growth, capturing more market share. They could acquire businesses that
complement their business or acquire businesses that supply theirs. Mergers and Acquisitions
encompass a number of possibilities dealing with cross selling and licensing, building strategic
alliances, spin-offs, and equity carve outs.

Threats of Each Approach


There are threats associated with any type of expansion a company may go through. For Kudler
Fine Foods using an initial public offering can be a risk because there is no guarantee of what
this stock will do on the first day. The stock may sell quickly or the stock may not sell at all.
Many people are not comfortable with initial public offerings because there is no historical data
on the company and this makes their decision on purchasing the stock difficult. Those investing
in the company want to be sure they will receive a return on their investment and without proper
documentation to back this up they may not be willing to make those initial purchases. The
private investors in the firm will also lose some control of the organization because now
outsiders gain voting control over the firm.
Kudler Fine Foods can also expand by acquiring another company. The threat with this decision
is the other company may resist the takeover. This means there is a risk of a costly takeover
battle. The more time it takes to take over the other company, the more money will be needed. If

the company is looking to expand right away and begin business immediately taking over a
company may not be the best approach. Once the company is taken over the financial benefits
may not be positive therefore putting the company in danger of failing.
Merging with another company is another option Kudler Fine Foods has to expand the business.
There are threats associated with this options that the organization must consider. Merging with
another company can cause employees of both businesses to resist the change. If employees are
not excited about the merge this can create difficulties for the company because employee
resistance can have an effect on customer service. Another threat with a merge is that the upper
management may not have the same outlook on the new merged company. Employee layoffs
may be a result of a merger because two or more people may now be holding the same position.
Regardless of the type of expansion Kudler Fine Foods decides to go with there will be threats
that must be considered and looked at carefully.
In brief, we can see that there are strengths and weaknesses in every business venture and all
should be considered carefully before making a decision. By cautiously weighing each advantage
and disadvantage of an IPO, merger or acquisition, Kudler Fine Foods can make an informed
decision on what would be best for the company and all involved. In the case of Kudler Fine
Foods, Team C believes that an initial public offering would be the best strategy for the
company. Kathy Kudler has proven the viability of her idea of a gourmet food store with the
opening of two new stores in just 5 years. By going public the company could possibly generate
enough capital to go statewide within the next ten years and statewide in twenty.

Virtual Organization Strategy: Riordan Manufacturing


Riordan Manufacturing is trying to expand its operations and has tough decisions to make on
which direction would be the best and most successful to move forward for expansion. The
options that Riordan is looking at are: 1) Going public through and IPO (Initial Public Offering).
2) Acquiring another organization in the same industry to gain more market share. 3) Merging
with another organization to strengthen the company. There are many advantages and
disadvantages to all three types of expansion ideas. This paper will show all three, discuss the
advantages and disadvantages and make a recommendation on which idea will work best for
Riordan Manufacturing.
Going Public Through and IPO
Companies must evaluate potential advantages and disadvantages that may arise when deciding
to go public. For instance, what are the strengths, weaknesses, opportunities, and threats of
becoming a publicly held company. To become a publicly held company, the company must
conduct an Initial Public Offering. An Initial Public Offering is the initial sale of stock by a
company where ownership shares are sold to the public to raise money for the company going
public.
Becoming a publicly held company through an Initial Public Offering may cause a temporary

increase in the value of stock or share price because Riordan Manufacturings been in business
since 1993, has plants in Georgia, Michigan, California, and China, and has earnings of $50
million in 2005 (Apollo Group, 2006). The weaknesses of going public through an IPO are the
costs associated with the Securities and Exchange Commission (SEC) regulatory requirements.
For example, audit fees, printing fees, investor relations (IR), and additional accounting
personnel. The costs of hiring a Stock Firm to market the IPO through one of the Capital
Markets. The opportunities of going public include raising capital for research and development
projects (R&D) or pay off existing debt, and generating publicity to a new market. One threat
that Riordan will experience is competitors will have immediate access to future business plans,
financial data, and their competitive strategy. Publicly held companies must disclose these plans
and data to all prospective and current stockholders.
According to Riordan Manufacturings economic overview, they forecast positive economic
conditions, which indicates low interest rates on new investments and increase productivity.
Although no one knows which way the economy or the stock market may go, Riordan
Manufacturings focus is to maintain its profitability whether private or public. Although
Riordan Manufacturing is profitable and successful in the private sector, changes will occur in
the public sector because there is less control, more costs, and obvious disclosures.
Acquiring Another Organization in the Same Industry
Procuring additional corporations is a common movement for some businesses that desire to
enlarge their own operations, lessen the probability of competition and assume new abilities or
assets that the company would not have. Conversely, there are downsides to acquisitions,
particularly when viewing the price and the cost of joining two comparable companies. Riordan
Manufacturing, which has acquired other companies in the past and is considering this option of
acquisition again.
A prime advantage that Riordan Manufacturing has in acquiring a business, is the increased
income that the company can assume after acquisition. Especially, when Riordan purchases
another company that markets or produces a distinctly diverse service or product different from
the products that Riordan markets or produces. The newly acquired business can continue
operations and direct income in the direction of the new parent corporation, permitting for larger
Gross and Net income report totals. Gross and Net Income may also increase by the sale of
resources of the attained firm.
If Riordan acquires another company it also acquires the proficiencies and skills of the new firm,
which permit the company to profit from the acquired companys core skills. This move will
also help to reduce competition, and the company naturally obtains the share of the market that
the acquired firm had, which will automatically increase Riordans share of the market. This is
the advantage of purchasing a rival company, not an entirely different firm that markets or
produces other types of products.
The costs Riordan would pay to acquire another company can be high, particularly if it becomes
a tough acquisition, or if they need to work deals out with the board of directors, or to hire
accountants and other key personnel to value the acquisition. The new firm and its stock value
may have value at one price at acquisition but drop after because of the acquisition itself, after
IPO. Costs may also increase to keep key employees who may want to leave because of the
acquisition. Additional costs may include lawyers, marketing firms, advertising firms and,
accountants.

Merging with Another Organization


Merging is an option for companies seeking to expand. Merging combines two or more
companies in the same industry to capture market more market share and when combined
become one stronger company. When companys decide to merge, the decision is based from a
mutual agreement of both companys. The companies agree to become a single new company
and operate as one.
The strengths that Riordan Manufacturing could gain from merging would be acquiring a larger
market share. Riordan Manufacturing could choose to buy out a smaller competitive plastic
company, enabling the smaller company to process the plastic used to make more fans and sell
more. Riordan Manufacturing could take over the firm by acquiring stock, bring in a positive
cash flow, and decrease debt.
The weakness in merging involves the risks the firms take on by buying a company out.
Management, shareholders vendors, and customers may oppose the decision to merge. Previous
concerns dealing with the target firm may surface. The target firms do not want to give up what
they have and could seek other options to recover financial shortcomings such as bankruptcy.
The opportunities that Riordan Manufacturing could gain from merging are limitless. Riordan
Manufacturing will have an opportunity to provide plastic manufacturing solutions to more
industries and expand their practices. Riordan Manufacturing will be able to operate at a larger
capacity and complete tasks faster because of an added workforce.
Riordan Manufacturing will face threats with any merger. There is no guarantee that the plan will
follow through as envisioned. Factors such as competitors, employees, and the target firm may
interrupt the deal before it surface. The target firm may decide to pull out of the deal. Employees
who do not agree with the deal may try to sabotage any deal and become untrustworthy, hurting
any deal.
Conclusion
When looking at all three options available to Riordan Manufacturing, the best option to raise
capital for expansion would be an IPO (Initial Public Offering). This is the fastest and most cost
effective way to expand the company to gain capital. There are costs that are associated with the
IPO, but a good Stock Firm will help to mitigate those costs when handling the IPO for Riordan.
The stock firm will do this for a percentage of the sale of stock. A strong IPO will bring in
Millions of Dollars for a new IPO. The advantages of the IPO are the restriction that any person
participating in the IPO cannot sell their shares for at least six months, which protects the stock
value. Without that protection, the stock value could plummet instantly with the immediate
resale of stock shares. All three options have advantages. Acquiring another company in the
same industry would help to increase market share and build on profit. Merging with another
competing company would make a larger company and increase market share and profit for the
newly merged company. The problem is that neither of the other two options will generate the
cash flow that an IPO will generate.
References
Apollo Group. (2006). Virtual Organization website: Riordan Manufacturing. Retrieved

December 28, 2012 from https://ecampus.phoenix.edu


Lacoma, T. (n. d.). Pros and Cons of Acquiring Another Organization. Retrieved from
http://smallbusiness.chron.com