Analysis of Singapore Telecommunication Company Investment in Telstra Corporation Limited - Example

Name Instructor Course Institution Date A report on Singapore Telecommunication Company investment in Telstra Corporation Limited Summary Singtel Company and Telstra Ltd are both telecommunication companies located in Singapore and Australia respectively. Their main aim is to attract many customers through providing quality services. Singtel has acquired services from Telstra in Australia. Both companies have merged or acquired stakes in different business entities located in various parts of the world. They both carry out cross-border transactions with various companies. The companies are affected by currency fluctuations and are both engaged in the foreign exchange market. Introduction Investing is the process of committing capital or money to an activity, expecting to gain more profits or income. Investing can be in the form of time since one can commit his time to conduct an activity with the expectation of gaining something from that activity. Investment incomes can come in different forms that include appreciation, profit or interest earnings (Brown & Lloyd, 2006: 90) .The intended purpose of investing can be of short-term or long-term gains. Choosing an investment is done in the right since investing is a risky process as the intended investment can achieve either profit or loss. It is relevant to carry out research on the proposed investment and analyse the advantages and disadvantages of the investment before engaging in it. Definition of terms Cross-border M&A: it is the process of combining or transferring ownership of companies, their operating units or other business organizations in various countries. Exchange rate: the price at which the currency of a individual nation is changed for with another nation’s currency. Foreign exchange market: it is a business entity where participants have the ability to exchange, sell, buy and speculate on currencies. Exchange rate risk: it is the risk involved dealing with currencies that have no fixed-parity values. Exchange rate risk management: it is the process of controlling risks involved in dealing with currencies that have no fixed parity values. Transaction exposure: it is the risk a company faces when associated with worldwide trade that the currency exchange rate changes after the entities have entered into a financial agreement. Translation exposure: it is the risk that, equities, income, liabilities or assets of a company will change value due exchange rate changes. Hedging: it is an investment procedure created to remove a potential loss on a business entity by buying another business that is expected to perform in a positive manner. Acquisition: it is an action in which a corporate buys almost everything that the target company has ownership stakes in for it to assume control of the target firm. Investor Company: it is a business entity privately or publicly owned that intends to either acquire or merge stakes of business entity. Investee Company: A business entity that publicly or privately intends to either merge or sell some of its stakes to another business entity. Equity: it is the stock or the ownership interest in business. Assets: it is anything of value that an entity owns, has use of, or benefits from in generating income. Liability: it is an entity’s obligation that arises during its business operations. Background data on Singapore Telecommunication Ltd and Telstra Corporation Ltd Singapore Telecommunication Ltd (investor) Singtel is a telecommunication company located in Singapore. The business environment in Singapore is safe and pro-business. According to the 2014 business environment ranking, Singapore is the world most investor-friendly location. It is a communication company that provides a variety of communication services and solutions that include fixed, data, mobile, the internet, satellite, information and communication technology and pay TV. The company has offices in different countries territories that include, Pacific Asia, the US, and Europe (Humphreys, 2008:20). The company uses the process of merging or acquiring services of other telecommunications companies in its growth. An example is, Singtel has acquired the services of Telstra Ltd in its telecommunication operations in Australia. Telstra Corporation Ltd (investee) Telstra is a telecommunication and media company situated in Australia. It is the largest telecommunication and media company in the country. The company builds and operates market voices, telecommunication networks, internet services, pay TV and other entertainment services and products. The company has its presence in 22 countries in the world offering the same services it offers in Austria to those other countries. Telstra as a history in Australia, it originated together with Australia Post as a government department but is fully privatised now. Its main aim is to be customer focused and to increase presence in the international market. The company retains ownership of the pay TV, fixed line telephone network and the data cable network Foxtel in Australia. Companies that offer this services must deal with Telstra, with the exception of TransACT and Optus companies. Impact of currency fluctuation on Telstra Corporation Ltd It has had an effect on Telstra’s revenue income. When the currency of one of its member country declines in value by a certain amount, it means that revenue income of the same amount generated by its customers using that currency decreases. Currency fluctuation has also had impact on the company’s projects. In every project that the company wants to undertake, they estimate and value the cost of the project then set aside funds for the completion of the project (Lien, 2011: 43). There are instances where, after setting aside funds for the project the value of the currency then declines. This results to the escalation of the project cost Methods used by Telstra Ltd to manage currency risk Diversify investments: this process helps the company spread its risks. Since the company has different stakes in various countries, its currency risks are diversified. This way when the value of currency declines in one country the investment in other countries then help balance the income. Investing during times that suit the company: the company has employed analyst who have specialised on foreign exchange and advice the company on good times to invest in the various countries they are located. Reduction of transaction cost: In countries, that the company projects having a decline in its currency value it minimises its transactions costs to costs that will gain them the maximum profit available (Lien, 2011: 95). Re-measurement process: when the company is involved in business with entities using foreign currency then can agree to re-measure to manage the currency risk. Re-measurement is when the value of the currency used for payment changes they can measure the value of the currency according to their own agreement. Stating the currency to be used in business transactions involving Telstra: this sets a specific currency that is to be used to set a fixed standard where if the value of the currency increases or decreases you to have still deal with. This helps to moderate business entities that always use different currencies that favour them while doing business with the company. Potential impact of currency fluctuation on a potential acquisition Currency fluctuation can either have a positive or negative contribution to a potential acquisition. If the value of the currency increases in the country where the sale was to take place the valuation of the property may increase therefore pricing out the intended buyer. The business for sale may be sensitive on currency fluctuation particularly if it focuses on exports for example, a mining company. If the currency it trades with increases in value, the seller maybe tempted to stop its sale because of the increased income (Lien, 2011:132). A seller may also use currency fluctuation rates to determine the type of currency he is to be paid with. Since the seller is profit orientated, he or she may decide to go for a high-value currency increasing the value of the property, therefore pricing out the buyer. This system of picking a currency to be paid with by checking the currency with the highest value in the foreign exchange may be risky due to the rapid exchange rates fluctuation. The currency fluctuation can cause an economic risk on the potential acquisition. The relatively short-term effects such as economic exposure and the long-term effects of currency fluctuation can affect the business entity (Whitaker, 2012:73). It means a change in the present value of the future after-tax flows due to currency fluctuation. Currency fluctuation can also cause a translation risk on the potential acquisition. The financial records of an overseas subsidiary are translated to the home currency for it to be consolidated into the organisation’s financial statement. Therefore, an investor company to merge with an investee company that has branches in different countries can decide against the acquisition to the translation risk. Currency fluctuation can lead to leading and lagging. When the investor company expects that the value of the currency that the investee’s company conducts business with will reduce, they may attempt to delay the acquisition process. Methods of managing the impact of currency fluctuation on a potential acquisition Making an acquisition conditional on the exchange rate movements: if the seller is concerned by the exchange rate impact on the value of his property, the seller may decide to make the sale conditional on an exact currency remaining above or below a particular level. The seller will need to be specific on the circumstances causing the exchange rate condition (for example when will the measure take place). Minimum sale price set: in a sale involving foreign currency, the seller may decide to set a minimum price on the item on sale in case the value of the currency used decreases in value (Whitaker, 2012:120). Setting the minimum sale price assures the seller of profits since he sets the price. Disclosure requirements: Before conducting a sale, the seller can name the specific currency that will be used in the trade. This creates a certainty that whether the value of the currency increases or decreases; it is the currency used for the trade. On-market purchases: this is whereby the buyer finds the item on sale on a particular day and is required to buy the item that same day with the exchange rate of the day. It is described as a buy on sight sale. Conversion mechanism: In some scenarios, the buyer and the seller can decide on setting their specific exchange rate and the buyer should buy the item on that rate in regardless of the official exchange rate in the market. Impact of a sharp fall in the investee company’s operation currency against major currencies on the acquisition Most of the companies in the world use major currencies such as the US dollar to conduct their businesses. A sharp currency fluctuation of Australian currency against major currencies results to losses to the Telstra Company. When the company stakes are in the process of being acquired, and the Australian dollar declines against major currencies, the investor company can decide against proceeding with the acquisition process. This decline in the Australian dollar causes the valuation of the company’s stake to go down. The investor company may finally decide against acquiring the investee’s stake and venture into other businesses whose operational currency is on the increase. All the invitee’s company’s assets and equities decrease in value as a result of its operation currency declining against major currencies (Lee, 2008: 37). Hedging approach A good hedging strategy is a strategy that involves financing the working capital of a business with minimal risk to gain profits. It performs on the principal of financing, which is utilizing long-term sources for financing long- term properties. There is the conservative hedging strategy and the aggressive hedging strategy. Conservative hedging strategy is an approach to conserving the financial working capital with minimal risk while achieving profits. Without considering the permanent assets and fixed current assets, a part of temporary working capital is funded by long-term financial sources. It has the minimum liquidity risk at the expense of higher interest outlay. The aggressive hedging strategy has its complete focus on profits. It is a high-end profit strategy and the dearer funds that include, long-term funds are only used to finance fixed assets and a section of the permanent working capital. The permanent working capital and the complete temporary working capital are funded by the short-term funds. Conclusion In conclusion, both Singtel Company and Telsra Ltd are telecommunication companies that provide telecommunication services. The companies have both merged or acquired stakes in several companies around the world. They are the leading telecommunication companies in their respective parent country. Both companies have a large following in both the parent company and the companies they own a stake. They complement each other, for example, Singtel Company acquiring the services of Telstra Ltd in Australia shows it. The companies are also engaged in the foreign exchange markets. Recommendations The investor company, Singtel should consider the exchange rate before conducting a cross-border transaction. The currency valuation of the particular country that the company intends to conduct business with may be declining and, therefore, the possibilities of gaining losses are great. The company should therefore, avoid conducting business in that country at that particular time. The investor company should analyse the business environment of the company that it intends to conduct cross-border transactions. An appropriate working environment is where a company can conduct without external pressure or interference. The business environment then helps the investor choose whether to invest in or not. Volatile business environments are not safe for an investor company to conduct its business in. The investor company should conduct market research on the investee company. The investor company should know the type of business the investee company undertakes and know the geographical and financial background of the investee company (Rothacher, 2005: 54). This research helps evaluate if it is worthwhile to conduct cross border transactions between the investor company and the investee company. The investor company should set terms and conditions for the cross border transaction. This procedure helps streamline how the transaction was conducted and the conditions that need to be fulfilled before conducting the cross-border transaction. An example is setting the currency to be used during transactions between the two companies. Make personal contact with the investee company. This will help the investor company have a personal assurance that the cross border transactions with the investee company is done with the right and legal owners of the investee company. Personal contact gives assurance to the investor company that the investee is aware of their cross border transaction. The investor company should make contact with the investee after the end of the cross border transaction. The relationship between the investor company and the investee company should not end after the transaction (Whitaker, 2016:35). The relation between the two companies after a transaction determines whether the companies will carry out future transactions together. The investor company should check whether it is valid to conduct cross border transactions and the validity of the investee company to carry out the same transactions. This helps sort out the issue of the validity and the legality of the transaction. Bibliography Browne, C. H., & John,B.L. (2006). The little book of value investing. New York, Audio Renaissance. Humphreys, N. (2008).Complete notes from Singapore. Singapore, Marshall Cavendish Editions. http://site.ebrary.com/id/10515520. Lee, E. (2008). Singapore: the unexpected nation. Singapore, Institute of Southeast Asian Studies. Lien, K. (2011). The little book of currency trading how to make big profits in the world of forex. Hoboken, N.J., John Wiley & Sons. http://public.eblib.com/choice/publicfullrecord.aspx?p=699416. Rothacher, A. (2005). Corporate globalization: business cultures in Asia and Europe. Singapore, Marshall Cavendish. Whitaker, S. C. (2012). Mergers & acquisitions integration handbook: helping companies realize the full value of acquisitions. Hoboken, NJ, Wiley. SRIVASTAVA, R. M. (2008). Multinational financial management. New Delhi, Excel Books. Whitaker, S. C. (2016). Cross-border mergers and acquisitions. Read More