A privately held U.S. plumbing parts manufacturer is negotiating the purchase of a Brazilian plumbing manufacturer specializing in water conservation. There are a few reasons why Peterson is interested in the acquisition. First, Peterson Valve wants to gain access to the manufacturing processes that are hard to develop. Second, Peterson valve will be able to gain a large market share through the diversification of operations and new market penetration. The third reason is that Peterson valve will be able to gain the economies of scale of expanding its operations such as reduction in average cost of production, increase in productivity, managerial specialization and large access to funding.
There are some major uncertainties and potential risks that Peterson (the U.S. Company) faces, they are:
1. Possible interest rate increase up to 11.75% in Brazil
| 2. Inflation rate in Brazil. Current inflation rate is 5.22%, the government’s goal is to control it at 4.5% but the analysts forecast it will be 6%-7%
| 3. The upward pressure on the real
1. Determining a discount rate for the acquisition analysis
| 2. Evaluate the exchange rate risk
Analysis on uncertainties
The high interest rate in Brazil poses several risks to Peterson’s acquisition on Milagrol. Despite the higher borrow cost that business has to carry which will lead to higher cost, the higher interest rates also act as a disincentive to carry a balance, which ultimately curbs consumer spending. Many businesses, of course, are not dependent on end consumers for their profits. These companies are better insulated from high interest rates, but not immune. Ultimately, a slowdown in the rate of growth in the economy causes a build of inventories at the retail level, which leads to a reduction in durable goods and manufacturing orders. Thus, producers, many of whom felt the initial effects of higher borrowing costs, eventually...
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