U.S. Semiconductor, a semiconductor manufacturer decided to expand their business to UK market in 1980. Their new business plan needed specialized technical support facility in UK. In order to minimize the equity investment, they decided to fund their assets mostly with debt. As Semiconductor owned subsidiaries, which spread all over the world, they face great exchange risk. Besides, instead of building a production department in UK, Semiconductor kept producing their products domestically and delivered them to UK by plane. British firms also confronted exchange risk due to the difference between import costs and sales revenues. This case mainly involves the discussion on the method of debt funding.
Learned from the analysts' commands, there are two financing alternatives: through a five-year loan in USD at 8% per year or take a loan in pound sterling at 12% per annum. Both the difference of interest rates and the volatility of the exchange rate are crucial factors to the decision about funding way. There are five main parties got involved in this discussion.
1. Local management backed by Group Vice President for European Operations preferred pound sterling funding. The reason they opposed dollar funding is that Semiconductor had already confronted with high technology risks due to the big gambling policy performed by Andrew Godfornough, the CEO of the company. It is improper for the company to take any more exchange risk.
In my opinion, although exchange risk, to some extent, will be eliminated by borrowing in sterling and paying back with the same currency, extra costs will rise from this method. As Semiconductor's main business was in the US, they need to put more efforts on negotiating with a large number of British commercial banks to establish good relationship with them. Large amount money, including commissions and other fees, will be spent on working with banks in UK. Besides, the company decided to go for "plain...