Joint Venture Financing, Organizational and Corporate Governance Relationship in Mexico
Describe the recommended financing, organizational, and corporate governance relationship that could be jointly ventured with PepsiCo.
According to a bottler, joint venture with PepsiCo will bring in more financing, which might help in improving its manufacturing and distribution process. In addition, the bottler could also assume a more active participation of PepsiCo in developing its organizational activities to capture more market share in the region. Moreover, the bottler could demand a low interference in the management related decisions of the company by PepsiCo. In this context, Brealey et al. (2012) suggested that joint venture mainly help organizations to improve their current operational capacity, which might increase their overall market share.
However, PepsiCo is mainly looking for bottler in Mexico, which could change their overall organizational and governance structure. In addition, PepsiCo is willing to invest relevant finances in the joint venture to increase their market share in Mexico. Moreover, PepsiCo is manly demanding adequate control and decision-making capability in the joint ventured company to support its future endeavors. Damodaran (2016) mentioned that adequate control in joint ventured companies mainly helps investors to make sound managerial decisions, which might in turn help in improving profitability of the company.
Evaluating the impact of governance structure on joint venture investment and PepsiCo willingness to pay:
The overall governance structure of PepsiCo in Mexico could eventually change after joint venture with Deltex, as the company will increase its overall operational capability in new frontiers. In addition, PepsiCo willingness of pay is relevantly high, as it needs to increase its market share in Mexico and raise the competition level for Coco-cola. However, the governance structure in Mexico after the joint venture could improve operational capacity and help the bottlers associated with PepsiCo to improve their overall return on investment. Vernimmen et al. (2014) stated that adequate governance structure mainly help organizations to clarify future objective and goals, which might help in achieving sustainable growth.
The overall cost of calculation for PepsiCo in the Mexican region is 7.732, which could be used in making adequate investment decisions. Moreover, the derivation of cost of capital mainly helps in making adequate, which eventual help in increasing return from investment. In this context, Liesen et al. (2013) suggested that with adequate cost of capital derivation, companies are able to adequate use NPV method for choosing adequate investment opportunities. On the contrary, Dhavale and Sarkis (2015) argued that cost of capital mainly loses friction during an economic rises due to the liquidity that is being conducted in the capital market.
It effectively depicts the overall value of PepsiCo’s investment conducted in GEUSA. In addition, it also helps in understand the overall return from investment, which could be provided in near term. Moreover, the overall NPV is $1.70 million, which mainly portrays the overall return from investment for PepsiCo. According to Liesen et al. (2013), NPV mainly help organizations make adequate decisions by analyzing the overall return that could be generated from a particular investment. On the other hand, Damodaran (2016) criticizes that NPV does not accommodate the changing external environment that might negatively affect return from an investment and increases overall risk of the company.
Moreover, PepsiCo has initially invested around $33 million and attained 20% of GEUSA share, which gradually increased to 40%. In addition, the increased shares in GEUSA mainly helped the company to increased its profits from 10%-15% to 16%-19%. Thus, it could be conclude that PepsiCo is entitled to 40% of the overall profits, which is being generated by GEUSA. Ehrhardt and Brigham (2016) mentioned that strategically planned joint venture is mainly beneficial in long run and maximizes profitability of both parties. However, Johnson et al. (2015) argued that joint venture some time could be negatively affected by external factors, which in turn could reduce overall growth prospects of both the companies.
According to an agencies perspective both PepsiCo and Deltex will be handsomely rewarded after the joint venture, as they might have significant improvement in their operational capability. Moreover, PepsiCo after the joint venture could have an access to a higher market share from Mexico and in turn raise the competition level for Coco-cola. However, Deltex bottler might receive major incentive from joint venture as it was facing difficulties in financial, technical and managerial resources. Dhavale and Sarkis (2015) argued that investment with the help of NPV could lose its friction during an economic crisis and deliver reduced profitability from the project. Moreover, the joint venture could boost technological improvement in Deltex to support its overall growth prospects in Mexico. Moreover, with the help of financial and managerial resources, Deltex could increase quality and productivity of its workforce, which in turn might increases chances of the company to achieve the set objectives. In this context, Coles et al. (2012) mentioned that only after effective evaluation and growth prospects companies enter into a joint venture, which in turn helps in maximizing their overall productivity.
Evaluating the overall costs and benefits for PepsiCo for forming alliance or contracting with Deltex:
Deltex being one the major bottler in Mexico had its deliver point in around 88,000 locations, which mainly helps PepsiCo to increase its marketing share. In addition, the Deltex was larger than both Gallardo and Protexa, which helped PepsiCo to increase its sales by 49.7% in the region. Moreover, the joint venture enabled PepsiCo to capture customer and around 11,700 people as cheap labor to support endeavors of the company in Mexico. In addition, Deltex also has subsidiary companies, which produced plastic bottles, bottler caps, containers and packaging material. These additional subsidiary companies mainly helped in reducing the overall cost of production and increased competitive edge of PepsiCo. However, PepsiCo could only invest once to form an alliance and enjoy the overall retune on investment from the joint venture.
Moreover, a contracting agreement with Deltex could only increase expenditure of PepsiCo, which might affect its overall profitability from Mexican region. In addition, a contracting agreement could limit PepsiCo ability to make adequate management decision for Deltex to improve its operations and in turn raise the competitiveness for Coco-cola. Furthermore, the contracting agreement could fix an overall amount, which is to be paid by PepsiCo to enjoy the services of Deltex.
Evaluating the maximum and minimum price PepsiCo could pay for 30% of the share:
The above-depicted table mainly represents the overall price, which could be paid by PepsiCo in attaining 30% share of Deltex. In addition, the price range from $150 – $225 million could be effectively established with the help of table 4. Flannery et al. (2013) mentioned that investment price range could lose friction due to the intense buying pressure from investors.
5.2 Evaluating the governance factors in determining the price range:
Increased market share and employee strength are the main governance factors, which help in determining the overall price range of Deltex Company. In addition, higher the market share of a company higher will be its value among investment companies. Cronqvist et al. (2012) suggested that investment companies effectively evaluate strength of different companies by analyzing quality of its workforce.
Evaluating the factors that might affect price:
Change in Economic policy, Inflation rate and exchange rate of Mexican government could affect the overall price range, which is being used by PepsiCo to acquire 30% of Deltex. In addition, these external factors might increase or decrease the overall investment of PepsiCo. In this context, Brealey et al. (2012) mentioned that during an economic meltdown investment opportunity in companies gradually increases, providing an effective entry point that might maximize return of investors. However, Vernimmen et al. (2014) argued that without short sell and valuation experience, trading during an economic crisis might increase the overall risk from investment.
Evaluating the final price to be closer to estimated minimum or maximum price range:
The final price range determined for acquiring 30 % of Deltex might not change, while conducting actual investments as only 10% of the shares are publicly traded. This reduced capital market exposure could effectively help PepsiCo to acquire shares of Deltex and have no major affect on in price range. Ehrhardt and Brigham (2016) stated that acquisition news mainly helps in boosting share price of the company and bring in more investment from different investors.
Conclusion:
The overall study mainly analysis the investment decisions that is conducted by PepsiCo to increase its market share in Mexican region. Moreover, the assignment also evaluates different benefits and cost that is associated with investment in Deltex Company. Lastly, the assignment uses assumptions to determine the price range that will be needed to acquire 30% share of Deltex.
Reference:
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., (2012). Principles of corporate finance. Tata McGraw-Hill Education.
Coles, J.L., Lemmon, M.L. and Meschke, J.F., (2012). “Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance”, Journal of Financial Economics, 103(1), pp.149-168.
Cronqvist, H., Makhija, A.K. and Yonker, S.E., (2012). “Behavioral consistency in corporate finance: CEO personal and corporate leverage”, Journal of financial economics, 103(1), pp.20-40.
Damodaran, A., (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Dhavale, D. and Sarkis, J., (2015). “Integrating carbon market uncertainties into a sustainable manufacturing investment decision: a Bayesian NPV approach”, International Journal of Production Research, 53(23), pp.7104-7117.
Ehrhardt, M.C. and Brigham, E.F., (2016). Corporate finance: A focused approach. Cengage Learning.
Flannery, M.J. and Hankins, K.W., (2013). “Estimating dynamic panel models in corporate finance”, Journal of Corporate Finance, 19(1), pp.1-19.
Johnson, C.J., McLaughlin, J. and Haueter, E.S., (2015). Corporate finance and the securities laws. Wolters Kluwer Law & Business.
Liesen, A., Figge, F. and Hahn, T., (2013). “Net present sustainable value: a new approach to sustainable investment appraisal”, Strategic Change, 22(3â€Â4), pp.175-189.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., (2014).Corporate finance: theory and practice. John Wiley & Sons.
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