Day-12 and 13

The days have started getting smaller and the nights longer. Although I generally have 2 and at most 3 sessions in a day but the assignments and the work each session demands, takes me almost the entire night to complete. Generally I sleep at 3 30 am after preparing for various presentations, assignments etc etc etc. You are suppose to have a group for every subject and almost in each session you have to be prepared with some or the other submission. For me the situation had become so complex (I have 6 groups) some time back that I use to talk to a group member about a subject just to realize that he was actually in some other group with me. However the things are getting better as now I am able to relate my group members with the corresponding subject. Time for insights I got in the two days

Day-12

I had two sessions on the day. In the morning I had Strategic Financial Management where we discussed the case of AJC (Australian Japan Cable). This case was related to three companies who wanted to co-operate in the project to lay underwater broadband cable between east coast of Australia to Japan via Guam where it will link to Asian and other networks in the region. They had to do this early because demand for broadband capacity was growing in Australia in the coming three years as the supply would fall short of demand. However with the cable technology and corresponding price declines of 25% each year made commitment to such a large investment of $520 Mn a risky proposition. Also the company had to decide on the following issues as all the 3 companies were equity partners.

- Ownership structure (how many sponsors and which ones?)

-Capital structure (project vs. corporate finance, leverage, type of debt, etc.)

- Organizational structure

-Board structure (how many directors? Should they be insiders or outsiders?)

-Management compensation.

This case highlighted the importance for finding the right partners for a project which is risky in nature and how to deal with above mentioned factors before the project is started so that there are no hiccups once we embark on the project.

The session in the afternoon was on Consumer behaviour where the case was about Olmec toys. Yla Eason, an African American, wanted to come up with ethnically correct toys as her 3 year old child was not able to connect with the white He-man. She decided to come up with new toys after conducting interviews with parents and launched Olmec toys. However the question was that the retailers were not open to accommodate the toys as they thought that there was no need for such toys in the market. We discussed the same case on the next day. The question was what should be the strategy for Olmec toys to make retailers understand that a market existed for such products and how can she succeed in selling the toys.

Day-13

In the morning we had Strategic Financial Management and the case was Airbus A3XX. Airbus wanted to move into the Very large aircraft (VLA >500 passenger) segment as Boeing had a monopoly in this segment. However the initial R&D costs were very high and the demand for such planes was unpredictable. Although Airbus believed that there was sufficient demand for VLA aircraf in the market due to its superior economies and predicted high congestion in the various airports in the future. We had to calculate the number of planes Airbus had to sell till 2019 to justify the high initial expenditure. I did the sensitivity analysis for various operating margins (15% to 30%) that Airbus would need to have to go ahead with the project with a manufacturing capacity of 48 planes/year. Or if it decides to increase the capacity what should be the number of planes it should sell at a moderate operating margin of 20%. I am sharing the analysis here.

Sensitivity Analysis-1	Operating Margins	Planes sold/year	NPV	Initial Order Book
Case-1	15%	48	-4211	54
Case-2	20%	48	-2838	54
Case-3	25%	48	-1465	54
Case-4	30%	48	-93	54
Case-5	30.35%	48	3	54
Sensitivity Analysis-2	Operating Margins	Planes sold/year	NPV	Initial Order Book
Case-1	20%	48	-2838	54
Case-2	20%	60	-1701	54
Case-3	20%	72	-564	54
Case-4	20%	84	573	54
Case-5	20%	78	5	54

As seen above it was not advisable to go ahead with the project as the NPV is very negative unless you are able to achieve a extremely difficult operating margin of 30% or able to manufacture and sell 78 planes in a year. However the important insight I got from the Porf was that we did not evaluate the tax shield which the high R&D costs would have as they would be expensed in the year of development. This would help the company to show losses and hence save the taxes. After incorporating this the breakeven comes around 44 planes/year which is within its manufacturing capacity at 25% operating margin.

The next two sessions were on M&A and I was really overwhelmed by the knowledge of the professor on the subject. I came to know the difference between the terms acquisition and merger. Although people use these terms interchangeably, however there is a difference in them. When a company acquires a company it becomes its subsidiary and its balance sheet is made separately. It has no right on the cash flows of the company unless the acquired company pays dividend to the parent company which is not desirable due to double taxation. Thus in India generally companies acquire the company and than merge it. For example Reliance Communication is a result of merger of 9 of its subsidiaries. RPL was started as a new project and now it is supposed to be merged with Reliance Industries. This strategy is used extensively by Reliance to take advantage of the benefits related to new projects and then when the projects are completed take advantage of the cash flows of the subsidiary so that there is no double taxation. This also helps unlock value for shareholders.