Dennis Shaughnessy is the senior vice-president for corporate development and Charles River Laboratories (CRL). He prepared a presentation to the company’s board of directors which request to invest up to $2 million in a Mexican joint venture (JV). They need to decide whether to do a joint venture between ALPES and CRL. Some other issues came out at the same time, Jim Foster, the CEO viewed the proposed joint venture as a potential distraction as his company continues to expand rapidly in the United States. Another issue Jim was worried about is that there are risks of investing in a country like Mexico which has an uncertainty market. Furthermore, he concerned about plan to partner with a small, family-owned company since it was not making new investment of their own but relied on CRL. Internal Analysis
A joint venture with ALPES can be seen as highly valuable. Currently, on an international scale there is a high level of demand for SPF eggs. In fact, demand is actually exceeding supply and thus allowing the suppliers of SPF eggs charge a premium. Moreover, it is expected that this demand is sustainable and will actually increase over time. ALPES is a family run entity that places a high burden on trust and quality; they are currently the superior SPF egg producer in Mexico and Latin America further emphasizing their value.
This joint venture would prove to be quite rare in the essence that most manufactures of the influenza vaccine are currently not using SPF eggs. Rather they relied on a less expensive standard egg. On the other hand, what makes this venture rare is the relation between the two entities. Many firms have been reluctant to invest in Mexican business opportunities due to high political corruption, a weak currency, and the fact that economically Mexico has relied heavily on the tourism rather than exports. However, the North American Free Trade Agreement has been implemented to facilitate such business growth.
There are many other producers of SPF eggs on a global scale. In fact, China and Brazil are currently producing higher quantities than ALPES in Mexico. The SPF egg production industry and business model is actually extremely imitable; there is nothing proprietary about it that hinders competition from entering the market.
ALPES is currently the only SPF egg producer in Mexico. Therefore they cannot be substituted for an alternative as one currently does not exist in Mexico. For a firm conducting business in North America; ALPES is operating in a monopolistic environment that is protected by NAFTA. This means that unless a Canadian or US firm would be willing to pay higher import tariffs for SPF eggs, they will be conducting business with ALPES. Thus there is no substitute available at this time.
Creating a joint venture with ALPES is highly exploitable. There currently is a demand for SPF eggs on a global scale. Moreover, the economic factors such as exchange rates and low labour rates in Mexico can seem inviting. ALPES is in need of capital before it can be fully exploited, this will ensure that quality standards are met along with demanded production levels.
$2 million would need to be invested in order to receive 50% equity in ALPES. With net income according to the income statement being $5,099,569, 50% of this gives us a total operating income of $2,549,784.50. Profit = Total Operating Income - Initial Investment
= $2,549,784.50 - $2,000,000
Return = Profits / Initial Investment
= $549,784.50 / $2,000,000
CRL has a return of 27.49% which could go towards ways of further growing the company such as advertising or expansions, etc.
Debt-to-equity ratio| total debt / total stockholders’ equity 97,258 / 761,215 = 12.78%| Debt-to-asset ratio| total debt / total assets97,258 / 950,870 = 10.23%...