Running Head: FOREIGN INVESTMENT ANALYSIS

Foreign Investment Analysis: A Tangled Affair Angel PinaHardin ACCU 615 September 15, 2013 Brandman University

Running Head: FOREIGN INVESTMENT ANALYSIS Foreign Investment Analysis: A Tangled Affair Introduction Knowing when and how to diversify a corporations operations can lead to major profit

or great loss. The Chief Financial Officer of Marisa Corporation must decide how to diversify its operations. One option Marisa Corporation is reviewing is the procurement of MBI International, a US-based multi-national corporation with operations in many countries. Before acquiring MBI International consideration must be given to the positive and negative affects of such an acquisition, how MBI International translates its accounts and the effect the exchange rate will have on these translations. Pros and Cons Marisa Corporation is a major electronics manufacturer headquartered in Connecticut. The Corporation is looking to expand globally; one possibility is to purchase a multinational company that is well established. A potential candidate is MBI International. MBI is a company that operates in a significant number of countries. Marisa Corporation needs to look at the positive and negative aspects of purchasing MBI International. Some positive outcomes for purchasing MBI International include establishing international presence and diversifying Marisa Corporations. Some negative outcomes of purchasing a multinational company include the company of interest may not disclose movement and fluctuation of currency in the countries it operates in. When looking at the positives and negatives effects of acquiring a multinational company that already has major international presence, it is encouraged and recommended review the financial reports from the previous years of operation to obtain a better understanding of how a company manages its finances. Having an international presence established, MBI

Running Head: FOREIGN INVESTMENT ANALYSIS International is able to offer a saving to Marisa Corporation because major advertising will not be necessary compared to if Marisa Corporation wanted to expand independently. According to Choi and Meek (2011), Marisa Corporation estimates that approximately 60% of MBI

Internationals earnings are from abroad (pg. 384). With the merger of Marisa Corporation and MBI Internationals, Marisa Corporation would expand globally. Entrepreneur Magazine (n.d.) states that buying an already established business is less risky and that taking over the operations is moderately easier as the business is already generating cash flow and profit. Although the purchase of an international company is convenient for Marisa Corporation there could be negatives side effects as well. Entrepreneur Magazine (n.d.) says if not careful, there is the possibility of being stuck with obsolete inventory, uncooperative employees or outdated distribution methods. According to Choi and Meek (2011), since MBI International

does not disclose data explaining the movement of the major currencies, Marisa Corporation should use caution before making an acquisition. Marisa Corporation should require MBI International to explain how the major currency are moved on their financial reports. With the rise of global acquisitions, it is important to understand the differences between US GAAP and IFRS. If Marisa Corporation decides to purchase MBI International, their accounting and financial teams will need to learn about IFRS. When generating annual reports, most companies have a private auditing company that validates the report. This is important to investors and stockholders to they have a better understanding on how their investment is being utilized. Investing in a company with global locations can create a burden on financial managers of Marisa Corporation. There be a requirement for additional training to ensure all in the corporation have an understanding if IFRS. Understanding [the] differences [between US GAAP and IFRS] and their impact on key deal metrics, as well as both short and long-term

Running Head: FOREIGN INVESTMENT ANALYSIS

financial reporting requirements, will lead to a more informed decision-making process and help minimize late surprises that could significantly impact, or even derail, a potential purchase or sale transaction in terms of either value or completion (PricewaterhouseCoopers, LLP, 2012). A major problem with a global acquisition is the fluctuation of the currency rate around the world. Choi & Meek (2011) state, fluctuating exchange values are particularly evident in Eastern Europe, Latin America, and certain parts of Asia (pg. 172). Additionally, this fluctuation can increase the number of translations create rates that can be used in the translation process and create foreign exchange gains and losses (Choi & Meek, 2011). Translations of accounts Some questions that Marisa Corporation should ask MBI International is how they translate financial reports from all of the countries within which they operate. Because all accounts translate differently, Choi & Meek (2011) state, translating accounts from a stable to an unstable currency is not the same as translating accounts from an unstable currency to a stable one (pg. 183). One issue already taken into consideration is the fluctuation of currency, which puts the 10% of MBI Internationals non-US revenue at a translation loss because of operating in high inflationary countries. Marisa Corporation should look at the different translation approaches that best suits the perspective, parent or local company, and their stockholders and investors. Three methods discussed by Choi and Meek (2011) are (1) the historical method, (2) the current method, and (3) no translation at all (pg. 184). Conclusion Marisa Corporation is a major electronics manufacturer that is looking to expand internationally; Marisa Corporations headquarters are located in Connecticut. Marisa

Running Head: FOREIGN INVESTMENT ANALYSIS Corporation has many options in expanding internationally. A possible option is to purchase a company already established internationally. A perspective company identified as MBI International would produce a faster return on their investment than having to establish a new company. Regardless if purchasing a company overseas or locally, there are positive and negative effects to acquiring of any company. These must also be taken into consideration when purchasing a company. However, once the decision is made to purchase a multinational company, the purchaser should state in which format they would like the translation of financial

funds prior to assuming custody of the new company. Knowing and understanding translation of currency when filing annual reports will offer some insight for managers and investors to know if their investment is paying off.

Running Head: FOREIGN INVESTMENT ANALYSIS References Choi, F. D., & Meek, G. K. (2011). International accounting (7th ed.). Upper Saddle River: Pearson Education Inc. PricewaterhouseCoopers, LLP. (2012, October). IFRS and US GAAP: Similarities and differences. Retrieved from PWC: http://www.pwc.com/en_US/us/issues/ifrsreporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2012.pdf Unknown. (n.d.). How to buy a business. Retrieved from Entrepreneur Magazine: http://www.entrepreneur.com/article/79638