Fin 370 - Virtual Organization Strategy Paper

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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...
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