Many Investment appraisal techniques are present to judge various projects’ feasibility. But often the most common technique used is the Discounted Cash Flows Technique. This rationalizes the firm, relevant and real cash flows that arise as a result of the implementation of the project. Considering the financial information of the takeover of the “New You” company it appears that the Inflows outweigh the Outflows so keeping in mind all the other factors aside the project of investment according to the basic guidelines can be started Charles, W, Hill & Jones (2008). At the same time the best project in terms of yield or return needs to be started in view of the limited resources available (internally generated resources).
Similarly there are other techniques for example payback period or even discounted payback period along with Net Present Value (NPV) and Internal Rate of Return (IRR) computations.
Acquisition of New You
Acquisition is always risky, both in financial and non-financial aspects. The option 1 requiresoptimistic leadership from the management along with acquiring the confidence of shareholders majorly Taylor family. The acquisition of New You which is located in South of England needs management to think various issues before making a decision. It is a diversification of market, where Serene Hall will market its product in South of England keeping the existing market of Central England. It is encouraging to grab the significant share of 29% in the marketof South England which in effect multiplies to 49.2% share in South of England. Marketing strategy needs to be altered for the proposal due to changed mix and match of market and product. The existing services may expose to new market i.e. South of England, and the new services i.e. Detox treatment may expose to existing market i.e. Central England Charles, W, Hill & Jones (2008). The demographic study may be reviewed for thelikelihood of the services in new market. The acquisitionmay distort the focus on strategy where the matrix structure may impliedly build due to New You take over. The level of authority needs to be streamlined as in either option management direction of scope should be specific and must be in lined with Serene Hall’s ultimate vision. The loss of staff due to redundancy may tarnish the reputation of Serene Hall and eventuallyof the Taylor family. Ecological and Social factors need to be reviewed for South of England for the feasibility of the project. The acquisition is challenging, demanding but not solving the staff issues, which may persist even after acquisition of New You. This can be solved with a human resource strategy to utilize the staff with the motivation in built in them. The staff training and development needs to be done on priority basis to put the confidence in staff to make them realize the trust of management for the upcoming challenges. Cultural clash needs to be addressed within the acquisition proposal, where the shared values within the staff may vary and eventually affect the business as a whole (Charles, W, Hill & Jones (2008).
This is very important to put a ratio analysis on New You Balance Sheet and Profit and Loss Statement as Serene Hall management is already in debate of debts and the further finance.
Expansion in market share where the existing staff already busy in rendering the services to existing customers, is too challenging for the management to grab the new business,put it in right direction and to maintain the expertise for which the reputation of Serene Hall stead. To avoid the Quality of services issues, a system of internal control needs to be built in for smooth operations. Management may delegate the departmental head’s responsible for operational management and Serene’s directors should not lose the sight to the strategic view.
Keeping all the non financial analysis aside, by far the financial benefits concerned are favoring the first option due to its long term yielding benefits on expected calculations estimated on the increased market share of the newly formed company as a whole. In accumulation to the extra revenue from the new addition since both companies are operating in the same segment will also benefit from the cost pooling. However the focus product of “New You” is Detox Treatment which is its selling point and thus as discussed would bar the cost cutting measures a bit but still acquiring a same industry company is bound to have reduced costs as a whole. Specifically it appears that Acquiring “New You” yields a net present value of around £180m due to increased sales and other factors discussed. But the argument of the risk involved in the process has to be borne in mind along with the risk appetite of the company as well as the management approach. Since management doesn’t want to indulge in something which they are not fully aware of or equipped with.
P.S High Risk yields High returns.
Investment to upgrade facilities
However, is more focused on organic growth which causes slow and steady growth and offers better room for management of a well planned and understood success and more so a type of growth which is difficult to imitate, keeping the originality and competitive edge with Serene Hall for a much longer time. Further on the internal growth has an unparallel impact on the level of motivation of the staff considering the fact that they are all a part of it all the time and it makes them feel as their own creation and thus helps them retain their interests in the organization as well as reducing the employee turnover. For the more stable organizations the preferred method to grow is that by internal growth but it does not suit the more vibrant management styles which believe in quick growth and immediate returns. However, the choice of premises and ambience chosen by the management, Taylor family’s magnificent building which is yet retained, clearly shows the management’s taste and steady nature and thus this might be an important factor that vibrant change might destroy the image and unique selling point of the organization. Organizations usually prefer the steady and stable growth for the very same reasons mentioned above Charles, W, Hill & Jones (2008).
Apart from the benefits of this organic growth it is clearly eminent from the sector structure that already tough competition is being faced by all and thus internal growth might halt the growth a bit due to the fact that every company has its piece and if one is not to acquire another company then the share needs to be taken away or snatched. In simple words the internal growth in facilities need to be very competitive and up to the mark to get proper benefit out of it, otherwise the same might just be good enough to retain the existing clients. Another factor to consider might be of the detailed expansion plan and difficulties faced in keeping the same original look in a different location since the increase in operations will bring increased number of clients which might be disliked by the existing clients who are used to the calm and quite when fewer people are around. The management decision might end up moving to some larger premises but then again will lead to losing of the existing image and a competitive advantage in the existing premises of Serene Hall.
Financially there is a steady impact on increase of income over the period of time and if a ten years inflow is assumed in return of £60m outflow in the first three years then still we see a positive Net present value of around £80m thus showing the fact that it is financially feasible although the benefits apart from the financial concerns are explained as above.
Withdraw from the market and close the facilities.
This seems pessimistic leadership where management is thinking of withdrawing from the challenge they are in. The option is suitable when shareholder decline to further finance the Serene which will knock off the other two options. The option is feasible for the purpose of retaining the quality services and focused customers. The focused strategy may allow the Serene to re-price its services in an inclining trend for the maintenance of its profits to existing level.
This may tarnish the image of Serene when customer would come to Serene, and they would decline to provide the services. The opposition of marketing director is valid in the context of converting the finance into sunk cost. The option is not suitable as Taylor family has recently resurrected and willing to take the further challenge to take the Serene to its peak. This decision would put the staff relaxed as well as the management, due to decision of declining the market share and losing its stake in Central England. The loyalty of customers may be affected as if once they are cured; they will be keen to come again. The option seems socially unviable.Losing you customer means giving a customer to your competitor. A better approach by the competitor may further grab the market share and Serenemay further lose the market share gradually. The decision is short-term and based upon the current business conditions. Strategies are not short-term, they long-term. Better controls and management of various facilities may turn around the situation.
The last option which is already subject to opposition by one of the directors yields a positive Net present Value of £41m showing that this option can be considered as financially feasible although there might be other arguments which say otherwise but still only keeping in mind the financial concerns management might as well adopt this strategy. The fact that there has already been investment in the subject area of concern which is strategically proposed to be closed is a handful and although, since it is sunk cost, will not make part of the financial analysis yet it is worth mentioning that closure would mean surrendering of market share back to the competitors and reduced sales resultantly. Similarly it is also to understand that the layoffs if any with regards to the excess staff spreads a wave of de-motivation throughout the staff raising concerns regarding the job security of the ones who are still employed. Similarly this does not send a very positive impression in the market as well of closure of activities and might be a perfect chance for the competitors to cash in and gain market share and image in the industry.
The discounting factor which has been assumed in this assignment is 10% and all the cash flows have been discounted with the same rate.