Going public through an IPO – Opportunities & Threats
An initial public offering (IPO) occurs when a company goes from a private company to a public company by issuing stock to the public via a stock exchange or multiple stock exchanges (CNN Money, 2013). Riordan Manufacturing can experience multiple opportunities by taking the company public through an IPO. The primary opportunity is the ability for the company to raise sufficient capital to fund the cost the financial accounting system’s overhaul. If sufficient funds are raised the company may also be able to avoid financing costs associated with obtaining a loan to pay the $850,000 balance that would remain after the CFO provides $500,000 towards the $1,350,000 costs (Riordan, n.d.). Additionally, it may also allow the company to incorporate the costs of manufacturing equipment, supplies, and other costs into the annual budget while allowing it to yield the minimum 12 percent hurdle rate required by Riordan Industries.
While this option produces many opportunities, the threats associated with it cannot be overlooked. The most significant threat is the implementation of additional programs and systems to ensure the company consistently complies with government regulations. For example, if the company goes public it will be required to comply with regulations and guidelines mandated under the Sarbanes-Oxley Act of 2002, which is often costly because companies are required to establish additional processes associated with external auditors; financial statement preparation; and time investments from the company’s CEO and CFO.
Acquire another company – Opportunities & Threats
Multiple profit and growth opportunities are available for Riordan Manufacturing through the acquisition of another company in its industry; however, the extent of these opportunities is dependent on the location or region of the new company. Currently, the company primarily serves the North American market, but has a facility in China (Riordan, n.d.). If Riordan Manufacturing acquires another company that is located in China or other foreign locations, it will have the opportunity to expand its customer base and target market, thus increase its earning and growth potential in the industry. The company will also have an expanded customer base by acquiring the new company’s customer list, which will also give it access to the vendors.
Although acquiring another company could provide an opportunity for Riordan to acquire additional customers, it also poses threats that may be more detrimental to the company. The primary threat is the possibly that other firms in the industry could duplicate the company’s strategy increasing competition in the market, which could ultimately lead to pricing pressures if the other newly-formed companies use aggressive pricing strategies that could force the company to reduce it prices.
Merging with another company – Opportunities & Threats
Merging with another company could produce various opportunities for Riordan Manufacturing, specifically in the area of financing. As indicated in the reading, the company needs to invest in a new financial system and manufacturing supplies and equipment. If the company merges with another company that already uses these systems and that has sufficient manufacturing supplies and equipment, these costs will either be eliminated or significantly reduced. Additionally, Riordan could consolidate their accounting records with the new company. If the new company uses a more sophisticated system, labor costs associated with the audit and accounting processes could be reduced.
Although the company has the opportunity to increase accounting efficiency with a merger, there are several threats associated with merger. The primary threat is the effect the merger could have on one of Riordan’s largest customers. As indicated in the reading, the Department of Defense is one of the company’s largest customers (Riordan, n.d.). Companies typically have to go through strenuous processes to receive approval to work on government contracts and it is possible that the Department of Defense will require the company that Riordan merges with to go through similar process to continue working with them. If the Department of Defense does not provide approval for the other company, Riordan will have to either use another approach or lose the contract to a competitor, which could inadvertently give that competitor a market advantage.
- CNN Money (2013). What is an IPO? – on CNN Money. [online] Retrieved from:
http://money.cnn.com/interactive/markets/what-is-an-ipo/ [Accessed: 2 Nov 2013].