The investment plan recommended for De Hav Airlines is its expansion into the hospitality sector. It was suggested that the most cost and time effective method of implementing this plan would be by merging with, or acquiring an established tour and travel operating business, thus saving the need to acquire real estate and hire and train new employees. The proposed investment plan is to be implemented over the course of one year with a budget of $100 million. CITATION Kop99 l 1033 (Koppes, et al.
, 1999)
This department will be responsible for making all the financial decisions related to the merger/acquisition of a suitable tour and travel agency, including conducting a cost benefit analysis of merging with potential targets, formulating a budget for all expenses, and finalizing a profitable contract for the integration. The department will also be required to track the company’s everyday transactional accounting and prepare forecasts to calculate the day to day cash flow needs of the newly integrated company.
CITATION Sat00 l 1033 (Satchell & Knight, 2000)
The first task of the financial department will be to conduct research on the most suitable targets for the M&A by investigating their profitability, popularity and financial standing, using their audited and certified accounts, or involving a third party to look into them. It would be beneficial to conduct detailed research on the consumer base that the targets appeal to, and whether integration with the target company will be appealing to De Hav’s own client base, which includes considering the target company’s area of operation, meaning that the company must operate in the areas where the airline flies, so that their customers can make use of accommodation packages in those locations.
CITATION Bru02 l 1033 (Bruner, 2002)It is also necessary to ensure that the target company is not in any kind of financial struggle, which may impact De Hav’s own financial standing post-integration, making the investment a failed venture. One key factor to be considered is the target company’s image and corporate culture, and requires a synergy assessment. It is important that the target company’s management and work practices, as well as brand image, be complementary to De Hav’s own. This will ensure that the integration process goes through smoothly, with employees working in swift coordination to ensure efficiency in both the sectors. The brand images of both companies must represent similar values and appeal to a similar base of customers, so that the integration does not result in loss of clientele due to negative reactions of customers to the integration.
Negotiation of M&AThe next step is to negotiate a mutually benefitting agreement with the target company and complete the relevant legalities required in the process. A suitable price must be decided and the means of consideration must be decided upon. The company must analyze whether payment is to be made in cash or if it wants to include offering of its shares to the bid. Cash payment is likely to deplete the company’s cash holdings and in case of stock offering, the shares must be premium priced. An advantage of offering shares is that the target company will have a vested interest in the long-term success of De Hav Airlines, and so coordination will likely be better and productivity of both sectors will be less likely to falter. CITATION Zol08 l 1033 (Zollo & Meier, 2008)Initializing the M&AThe financial department is also responsible for designating funds to each of the departments under the new organizational structure, and developing a new expense budget to manage the integration and bring it to fruition. The current expense budget for each of the four departments is $25 million each.
The integration will undoubtedly increase availability of capital for resource allocation and costs can be cut down by reducing the number of employees at both ends and retaining only the most experienced. Assets can be combined and used more efficiently to reduce overhead costs and allow room for appropriate marketing strategies such as discounted airline tickets and accommodation prices which can be used to attract customers and increase revenue. CITATION Daf02 l 1033 (Dafflon, 2002)The financial department must also keep a track of the costs being incurred and evaluate the profitability of the operations in the post-integration environment to determine whether the intended goals of integration are being met, and propose new methods of allocating resources, if needed, to address this problem.
The following chart represents the prospective plan of implementation within the one year time frame by denoting the key activities of the finance department in four phases of integration. Relationship with Other Departments Financial Department and Sales and Marketing DepartmentThe sales and marketing department will require a budget allotted to them by the finance department, out of which it must operate. The finance department will also develop credit policies which can be extended to customers by the sales department to improve sales. Both departments must work in cohesion in order to increase company revenue whilst maintaining low costs. In so doing, lower level employees of both departments should work together to set mutually beneficial goals, and allocate resources in a manner which both improves revenue and decreases expenditure. The new integration scheme will require the finance department to allocate appropriate funds which will be used to come up with a joint marketing scheme which improves sales for both the airline and the accommodation providing agency. These schemes will need to be assessed by the finance department and forecasts may be made to predict the strategy outcome in terms of sales and revenue.
Human Resources will be responsible for creating a new team of employees to run this newly integrated company, which means cutting out redundant employees at both ends and hiring new employees if needed, using the 25 million budget allocated by the finance department. Naturally, this will include providing the finance department with staff to carry out its duties efficiently. The financial department is also in need of a legal team, with the help of which the agreement of the integration will be made, which is to be provided by the HR department. Not only that, but HR must provide efficient staff to the financial department for both the hospitality sector, and the airline sector. CITATION Gom07 l 1033 (Gomez-Meija,, et al., 2007) This involves placement of employees in various locations depending on the location of the offices of the company, so that financial aspects of the company can be dealt with on a smaller scale as well, so as to be able to forecast the needs of the day to day running of the various offices, and report on the productivity and audit the activities of each office individually. CITATION Cas89 l 1033 (Cascio, 1989)
The operations department needs to work to ensure that all departments are working in coordination. It will help analyze the financial statements produced by the finance department and arrange the allocation of resources accordingly. It will use the information provided by the financial department to determine which area requires more spending and assess the efficiency of departments to decide where improvement is needed. MilestonesOnce the integration process has begun, it is necessary for the finance department to set a few milestones to record their progress and keep ambitions high. These milestones will help the company take a step by step approach to realizing the success of the integration, allowing a clear format to its workers for moving forward. Successful Integration of Financial Departments This requires De Hav Airlines and the target company to formulate a new system of infrastructure which meets the needs of both sectors. New Key Performance Indicators (KPI’s) must be developed to represent the new objectives, size and market share of the company, and financial data of both companies must be consolidated in one place according to Generally Accepted Accounting Principles (GAAP), as both companies form part of different service sectors and their data might retain the same meaning across both sectors.
The new financial department must devise new policies and allocation strategies according to the requirements of their newly integrated business model. A new budget and expenditure planning is needed for the next business cycle, since the integration will lead to an influx of capital and resources which must be allocated efficiently to improve revenue of both sectors. Additionally, the integration will cause a shift in business objectives for which a new budget must be devised in order to be able to effectively carry them out. Finally, new strategies can be developed and implemented to cut costs and merge resources in a way that helps the company achieve benefits such as economies of scale. StabilizationThe foremost milestone that must be catered to is the stabilization of the finances of the company, after the integration process is complete. The finance department must assess the operations and activities of the company to produce a report detailing whether the company has recovered from the initial investment and if the cash flow and other financial facets are back to pre-integration levels or if they have improved.
There are several risks involved in the merger and acquisition of a company, especially for the financial department. Some of the risks for De Hav Airline’s financial department in merging with a hospitality sector company include the following: Failure to Successfully IntegrateAlthough the two companies deal with the finances relating to different service sectors and might need to remain relatively separate from the get-go, the departments can still fail to successfully integrate into one holistic operating unit if the hierarchy and functioning of the department is not laid out from the initial stages of integration and the target company’s financial practices must be analysed beforehand to make the integration of processes easier.
Problems may arise if the financial department fails to conduct due diligence of the target company properly and may encounter issues such as incorrect valuation of the target company and improper target identification which can adversely affect the entire company’s financial standing.
It is possible that the pre-integration projections of the company’s success in terms of profitability might have failed to account for events such as economic changes, customer preferences in terms of travel, or just simply miscalculated the forecasted profitability of the integration altogether. In order to deem the integration a success, all these risks must be identified beforehand and dealt with accordingly.
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