Virtual Organization Strategy Paper Kathy Kudler founded Kudler Fine Food. She was once the VP of marketing for a large defense contractor. Weary of the constant travel and the pressures of corporate life, Kathy was looking for other opportunities. As it happened, Kathy relieved her stress through gourmet cooking and on a shopping trip for ingredients for a gourmet meal. Kathy suddenly realized there was an opportunity for an upscale epicurean food shop in La Jolla. Kathy developed a business plan, obtained financing and six months later, on June 18, 1998, the first Kudler Fine Foods opened.
Within nine months the store was at break-even and was profitable for the year. In 2000, a second store was opened in Del Mar and in 2003 a third shop opened in Encinitas. In this paper Team D analyzes the best option for Kudler Fine Food between going public through an IPO, acquiring another company within the same industry, or merging with another organization. Comparing the strengths, weakness, opportunities, and threats of all three options will help Team D to make a smart decision. Strengths of Each Approach Privately held firms looking for ways to increase cash flows are faced with a few decisions to make.
Some of the options businesses have to increase their cash flows are going public through an initial public offering, merging with another company, or acquiring another company. Each of these methods has their own benefits. The method is determined by which method is agreeable to the company’s level of risk. For a private company to raise money in the financial markets an initial public offering (IPO) has some advantages. One of the first benefits is generating revenue from the sale of shares of stock in the company. The company’s owners gain liquidity in their share of the company.
This liquidity makes it easier for the owners to sell their interests in the company. Going public gives the company access to the public markets in the future, and opens up the potential for higher growth and profit margins. Many public companies achieve a higher profile that makes it easier for them to attract vendors of goods and services. Merging with another company is another option for expanding and increasing cash flows. Mergers present several benefits to a company. One of these benefits is the sharing of resources. This sharing of resources could help reduce administrative costs.
Increased tax benefits are another advantage a company may realize with a merger. These tax benefits can be in the form of tax credits or the revaluation of depreciated assets and unused debt potential. Mergers can also result in an increase in market power through the reduction of competition. One other benefit from a merger is the reduction of bankruptcy costs that would be associated with a company in financial distress. Acquiring another company is another option that a firm has to expand its operations. This avenue may be more expensive than a merger, but many of the same benefits are realized.
Through acquisition, ineffective management is removed and replaced with a more efficient management team. The increase in market power from an acquisition is another benefit similar to that of a merger. Similar to a merger, an acquisition can help eliminate the competition. Weaknesses of Each Approach Arbitrage is when a purchase is made with the expectation of selling for a higher value in different markets. Spot exchange markets are efficient in the sense that arbitrage opportunities do not persist for any length of time. That is, the exchange rates between two different markets are quickly brought in line, aided by the arbitrage process.
Simple arbitrage eliminates exchange rate differentials across the markets for a currency, as in the preceding example for the New York and London quotes. Triangular arbitrage does the same across the markets for all currencies. Covered interest arbitrage eliminates differentials across currency and interest rate markets. Arbitrage is the practice of taking advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance; the profit is the difference between the market prices.
When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost. Opportunities of Each Approach Many opportunities for Kudler Fine Foods come with going public with an IPO. A considerably greater amount of capital comes from the issuing of shares for trading on the stock market. It helps increase the amount of business taking place if Kudler Fine Foods were to become a publicly traded company. Public firms tend to enjoy a higher profile than their privately held counterparts. This may make it easier to make sales and attract vendors to supply goods and services to the firm” (Keown, et. al. , 2005, p. 413). This growth would be to the degree that the current management infrastructure could not handle at this time. There would need to be some widespread foundational changes for Kudler to have this opportunity to issue stocks. The company knows the current stockholders, the value of the employees, and the company’s customers. Kathy Kudler is not concerned with working by another organization in the same industry.
Even though there are competitors, they are not as abundant in the California areas where her stores are located. She has noticed customers coming from the East Coast are familiar with gourmet specialty shops. She will compete in the industry by keeping her prices low and offering the product lines her customers’ requests. Kathy Kudler has done some catering and is considering expanding this division of the company. Kathy “is able to keep costs down and the profit margin is 25% better than product profit margin in the stores” (UOPX, 2003, p. 9). She still wants to oversee much of what happens during expansion for the business.
The 2003 Strategic Plan for Kudler Fine Foods outlines the expansion of the company concerning its SWOT analysis. The focus in the document is concerning ways the Kathy Kudler can keep a hand in the foods and services offered, yet focus highly on the needs of the customers. “As we continue to grow, there is always the possibility that we may be acquired by another company. Kathy could consider such a move in the future as part of her retirement plan” (UOPX, 2003, p. 10). So the company could merge with another company in the long-term, but there will be additional management helping to align the vision of Kudler with another organization.
Threats of Each Approach Like any venture a company may take, going IPO has many risks associated with it. Probably the biggest risk is that management loses complete control over the company. Going public brings investors onto the scene, all-vying for a piece of the pie. All financial documents are made available to the general public. This makes it easier for secrets to be obtained and makes the company more vulnerable. According to INC, “in a worst-case scenario, a group of dissident investors could potentially obtain majority and wrangle control of the company away from the board. Another threat is that if a company does poorly after going public, the IPO can generate bad publicity. In many cases of a company acquiring another organization, the downfall of the organization is traced back to poor planning and “insufficient appreciation of matters which may have been uncovered at the due diligence stage” (Stumm, 2005). Technical risks to an acquisition are also a concern. If a foreign company is acquiring an American company, there are restrictions under the Foreign Acquisitions and Takeovers Act; an example would be approval from the government.
Of course, a major risk to an acquisition is that the acquiring company can inherit greater debts than accounted for. The merging two companies can be a time-consuming and costly enterprise. It is very difficult to assemble two functioning companies and make them so that they work efficiently with one another. Often there will be management changes and layoffs. The two companies have to assemble a detailed contract and make sure to read each other’s goals carefully before signing any documents. Kathy has come a long way with, Kudler Fine Food.
Team D assed the company’s strengths, weaknesses, opportunities, threats, and financial implications with the three choices for financial growth. The three choices of consideration for Kudler Fine Food was to first, consider and IPO for public offering, second, to acquire a business within the gourmet food industry, or three find a company to partnership with in a merger deal. While comparing and contrasting each of the considered areas Team D recommends IPO over the other choices as this will lead to a sooner retirement for Kathy Kudler the founder with guarantee profits to look forward to. References INC, 2011.
Preparing for initial Public Offering. Retrieved from: http://www. inc. com/guides/preparing-for-initial-public-offering. html Keown, A. J. , Martin, J. D. , & Petty, J. W. , Scott, Jr. , D. F. (2005). Financial Management: Principles and Applications, Tenth Ed. Retrieved from https://ecampus. phoenix. edu. Stumm, Tony. Keeping Good Companies. 2011. Risk in Acquiring Company Businesses by Takeover. Retrieved from: http://www. allbusiness. com/management/516014-1. html University of Phoenix (2003). Kudler Fine Foods. Retrieved from https://ecampus. phoenix. edu /secure/aapd/cist/vop/Business/Kudler/Admin/StrategicPlan2003. pdf