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Financial Analysis And Management used by GlaxoSmith Kline

8160 Downloads1 I Published: 29 May ,2017

Who are Mergers and Acquisitions?

Mergers and acquisitions generally prove beneficial to the company in their tough times. Multinational companies grow big and expand by signing merger and acquisitions deals with small companies. Business leaders find rationale in acquiring small firms that has positive prospects for future operations as regard with growth and sustainability (Krajewski, Ritzman and Malhotra, 2012). In financial terms, such deals bring synergy gain to the acquirer company and increase the value of investment of capital contributors. Report signifies the importance of mergers through the proposed deal of Glaxo Smith Kline, the renowned multinational firm in pharmaceutical industry, who is keen on undertaking diversification through diversification. As the potential acquisition target has to be identified by two firms engaged in the similar line of business, being Oxford Biomedica Plc and Skye pharma Plc. Critical evaluation of financial performance is being made involving assessment of their capital structure and current working capital along with financial ratio analysis (Alexander, 2001).

Identifying two potential targets and rational for such acquisition targets

Glaxo Smith Kline is more focused on delivering three strategic priorities which mainly includes means to increase growth, reduce risk and improve long term financial performance (Van Horne James, 2002). As a matter of strategic planning, company is continue to invest in key growth businesses including emerging markets, vaccines and consumer health care. Hence, two potential targets have been identified which are doing well in the pharmacy sector being Oxford Medica Plc and Skye Pharma Plc. GSK tend to increase value of shareholders fund by accruing synergy gain through mergers and acquisition. Both the potential acquisition targets have performed well in the past years and have positive prospects for future growth and sustainability (Vogel, 2010).

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Rationale for acquiring Oxford Bio Medica Plc: Company has a long term relationship with Sanofi, which is also a leading pharmaceutical company. In 2013, company signed deals with major pharma companies, Novartis and Glaxo Smith Kline. GSK has been given an option to grant non-exclusive license under LentiVector platform technology patents for the treatment of orphan diseases. Company is to be awarded with £ 71 million package of grant and loan funding from the UK government to aid in expanding manufacturing capacity and reduce cost per patient dose. Such keen consideration on future operations will add value to GSK 's operations and make it gain competitive advantage (Swayne, Duncan and Ginter, 2012).

Rationale for acquiring Skye Pharma Plc: Company has identified a key opportunity in the treatment of asthma by the combination of fluticasone and formoterol. For the upcoming year, company is keen to maximize revenues from approved and pipeline product candidates, by developing new products and technologies through own research and analysis and collaboration with partners and signing mergers (Eschen and Bresser, 2005). Hence, it can be said that company will support the acquisition with due diligence.

Importance of working capital and capital structure management in potential targets

It is often noticed that companies may be high on account of profitability and reserves but are short of liquidity, which sometimes lead to deployment of long term capital funds for short term needs and eventually lead erosion (Evans, 2000). In order to overcome such circumstances and prevent the firm from facing financial crisis, it is vital on the part of finance managers to effectively manage the working capital requirements. Working capital is also a measure of solvency. Banks and financial tend to provide finance easily to the firms maintaining effective adequate working capital. Unless the regular payments to suppliers and trade payables are ensured, smooth functioning of the business cannot be expected (Bowersox, Closs and Cooper, 2002).Acquirer Company prior to making acquisition among the potential targets must ascertain the liquidity and solvency position of the firms through reviewing working capital Mergers and acquisitions generally prove beneficial to the company in their tough times. Multinational companies grow big and expand by signing merger and acquisitions deals with small companies. Business leaders find rationale in acquiring small firms that has positive prospects for future operations as regard with growth and sustainability (Krajewski, Ritzman and Malhotra, 2012). In financial terms, such deals bring synergy gain to the acquirer company and increase the value of investment of capital contributors. Report signifies the importance of mergers through the proposed deal of Glaxo Smith Kline, the renowned multinational firm in pharmaceutical industry, who is keen on undertaking diversification through diversification. As the potential acquisition target has to be identified by two firms engaged in the similar line of business, being Oxford Biomedica Plc and Skye pharma Plc. Critical evaluation of financial performance is being made involving assessment of their capital structure and current working capital along with financial ratio analysis (Alexander, 2001).

Identifying two potential targets and rational for such acquisition targets

Glaxo Smith Kline is more focused on delivering three strategic priorities which mainly includes means to increase growth, reduce risk and improve long term financial performance (Van Horne James, 2002). As a matter of strategic planning, company is continue to invest in key growth businesses including emerging markets, vaccines and consumer health care. Hence, two potential targets have been identified which are doing well in the pharmacy sector being Oxford Medica Plc and Skye Pharma Plc. GSK tend to increase value of shareholders fund by accruing synergy gain through mergers and acquisition. Both the potential acquisition targets have performed well in the past years and have positive prospects for future growth and sustainability (Vogel, 2010).

Rationale for acquiring Oxford Bio Medica Plc: Company has a long term relationship with Sanofi, which is also a leading pharmaceutical company. In 2013, company signed deals with major pharma companies, Novartis and Glaxo Smith Kline. GSK has been given an option to grant non-exclusive license under LentiVector platform technology patents for the treatment of orphan diseases. Company is to be awarded with £ 71 million package of grant and loan funding from the UK government to aid in expanding manufacturing capacity and reduce cost per patient dose. Such keen consideration on future operations will add value to GSK 's operations and make it gain competitive advantage (Swayne, Duncan and Ginter, 2012).

Rationale for acquiring Skye Pharma Plc: Company has identified a key opportunity in the treatment of asthma by the combination of fluticasone and formoterol. For the upcoming year, company is keen to maximize revenues from approved and pipeline product candidates, by developing new products and technologies through own research and analysis and collaboration with partners and signing mergers (Eschen and Bresser, 2005). Hence, it can be said that company will support the acquisition with due diligence.

Importance of working capital and capital structure management in potential targets

It is often noticed that companies may be high on account of profitability and reserves but are short of liquidity, which sometimes lead to deployment of long term capital funds for short term needs and eventually lead erosion (Evans, 2000). In order to overcome such circumstances and prevent the firm from facing financial crisis, it is vital on the part of finance managers to effectively manage the working capital requirements. Working capital is also a measure of solvency. Banks and financial tend to provide finance easily to the firms maintaining effective adequate working capital. Unless the regular payments to suppliers and trade payables are ensured, smooth functioning of the business cannot be expected (Bowersox, Closs and Cooper, 2002). Acquirer Company prior to making acquisition among the potential targets must ascertain the liquidity and solvency position of the firms through reviewing working capital management in the respective firm. Such assessment is also viewed as a significant part of financial due diligence.

Managing Working capital and capital Structure

Handling Receivables: Prompt payment to suppliers depends on the time taken by debtors to pay their outstanding dues. In order to ensure quick payment from debtors, appropriate credit policies are to be identified and laid (Grinblatt and Titman, 2002). These will involve in determining the rate of trade and cash discounts. Concessional offers on repeated purchases must be introduced so as to gain customer faith and loyalty. When the debtors are not manageable due to high volume of transactions, factoring measure is to be adopted.

Cash management: This will involve in determining the minimum and maximum cash position to be maintained for a given period, so that idle funds can be parked in better alternatives. Use of cash budgets will aid in cash planning and overcoming cash crisis.

Inventory management: Inventories are generally not considered to be quick assets as their liquidity depends on the duration of operating cycle. Inventories are to be managed in such a way that not more than required number of items are kept in stores and avoid unnecessary storage and carrying cost (Reilly and Brown, 2011).

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Capital Structure management: Managing capital structure involves in determining the proportion of equity and debt to be used to finance assets of the enterprise. Maintaining appropriate gearing ratios is primary requirement for the firms to get finance from various capital contributors like banks, financial institutions and shareholders (Schuler and Jackson, 2001).

Indicators to assess appropriate capital structure

Debt Equity ratio: Standard debt equity ratio varies among industries. However, a debt equity ratio of 2 is considered optimum. A firm must determine appropriate capital structure usually the amount of debt and equity so as to gain leverage effect and mark appreciation in the funds of capital contributors (Yu, Engleman and Van de Ven, 2005).

Handling Receivables: Prompt payment to suppliers depends on the time taken by debtors to pay their outstanding dues. In order to ensure quick payment from debtors, appropriate credit policies are to be identified and laid (Grinblatt and Titman, 2002). These will involve in determining the rate of trade and cash discounts. Concessional offers on repeated purchases must be introduced so as to gain customer faith and loyalty. When the debtors are not manageable due to high volume of transactions, factoring measure is to be adopted.

Cash management: This will involve in determining the minimum and maximum cash position to be maintained for a given period, so that idle funds can be parked in better alternatives. Use of cash budgets will aid in cash planning and overcoming cash crisis.

Inventory management: Inventories are generally not considered to be quick assets as their liquidity depends on the duration of operating cycle. Inventories are to be managed in such a way that not more than required number of items are kept in stores and avoid unnecessary storage and carrying cost (Reilly and Brown, 2011).

Capital Structure management: Managing capital structure involves in determining the proportion of equity and debt to be used to finance assets of the enterprise. Maintaining appropriate gearing ratios is primary requirement for the firms to get finance from various capital contributors like banks, financial institutions and shareholders (Schuler and Jackson, 2001).

Interpretation

Company has effectively managed its working capital requirements which are evident from observing above liquidity position depicted through current and quick ratio. Current ratio is considered to be a standard liquidity position required to be maintained (Vaara and Tienari, 2002). For the year 2013, current ratio turns out to be 1.65 against 4.12 of 2012. A significant change has been noticed in the year 2013. Decline in working capital is encountered in 2013 as the investments were sold in the year and funds might have invested in the noncurrent assets (Roberts, Wallace and Moles, 2012). Even company has positive signs of liquidity and solvency. It also controls sufficient amount of quick assets to meet current liabilities.

Analysis of capital structure management

Determining capital structure of the company is ascertainment of debt and equity mix to finance the company's assets. Unless an appropriate capital structure is determined, value appreciation in the funds of capital contributors cannot be made (Schmitt and Wofford, 2002). As an underlying fundamental assumption in determining capital structure of the company, it is often used a global practice to have a combination of both debt and equity mainly in the countries where the tax rates significantly changes and are kept high.

Risk Exposure

In order to scrutinize risk in capital structure, two types of risks present in capital budgeting are as follows:

Business Risk: - Possibility of loss or inadequate availability of profits in business is known as business risks. This type of risks mainly occurs due to change in consumer's demands, labour strikes, high competition level or change in rules and regulations by government. However, most of the firms pertains risks while performing their operations. Such kind of risks is so uncertain that can also lead in business failure in some cases. Business risks vary according to nature of business (Huang and Kleiner, 2004). There are two types of business risks: systematic and unsystematic risks. Systematic risk refers to a situation where whole economy faces downturn while unsystematic risks refer to situation when a particular faces downturn.

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Financial Risk: - It is a group risks that contains large number of financial risks such as asset-backed, credit, foreign investment, liquidity, market and operational risks. However, these types of risks can be reduced by a method known as Hedging. In such type of risky situations, if a firm gets insolvent, its creditors are repaid first before its shareholders if managers are using debt financing (Weber, Tarba and Reichel, 2009). These types of risks arise when a firm takes large amount of debts. So it becomes firm's liability to pay its financial creditors first rather than its own stockholders.

Financial Risk = EBIT / EBT
EBT = EBIT – Interest

Oxford Bio Medica PLC
2013 = 143.96 / -146.29
= −0.984072732
2012 = -238.57 / -237.45
= 1.004716782

From this ratio it can be stated that Oxford Bio Medica Plc is a debt free as firm has not taken any kind of loan from the financial institutions. Furthermore firm has high amount of equity in its capital proportion (Lodorfos and Boateng, 2006).

Skye Pharma Plc

2013 = 21.73 / -1.6
= −13.58125
2012 = 34.27 / -20.84
= −1.644433781

From this ratio it can be interpreted that Skye Pharma Plc is not debt free firm and company is not having proper equity backup for its debt which is an alarming situation for debt lenders.

Conclusion

For any business organization, regardless of the industry that it may be operating in, a very crucial role is played by facets such as financial analysis and management, mainly because of reason that it is a way through which authorities can identify as well as understand financial aspects of the firm. Such kinds of analysis and investigations into organizational working are essential from view point that they enable management of the firm to take appropriate decisions and help the firm to survive in the market for a long period of time. During the report, it was observed that GlaxoSmith Kline is one of the leading pharmaceutical companies in the world and is looking to acquire one of two given organizations - Oxford Bio Medica Plc and Skye Pharma Plc. By conducting thorough analysis of financial aspects of the two firms, it was suggested that GSK must acquire Skye Pharma plc, as it has a good net profit ratio, which would help GSK to substantiate its position in the pharmaceutical industry and also look to survive in the market for a longer period of time. Since Skye Pharma has an equity deficit, which in turn will help GSK to attain its corporate goals and objectives with great ease and comfort.

References

  • Grinblatt, M. and Titman, S., 2002. Financial markets and corporate strategy(Vol. 2). McGraw-Hill/Irwin.
  • Krajewski, L. J., Ritzman, L. P. and Malhotra, M. K., 2012. Operations management. Pearson Education Limited.
  • Reilly, F. and Brown, K., 2011. Investment analysis and portfolio management. Cengage Learning.
  • Swayne, L. E., Duncan, W. J. and Ginter, P. M., 2012. Strategic management of health care organizations. John Wiley & Sons.
  • Van Horne James, C., 2002. Financial Management & Policy, 12/E. Pearson Education India.
  • Vogel, H. L., 2010. Entertainment industry economics: A guide for financial analysis. Cambridge University
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