Far East Trading Company

Int’l Corporate Finance

IMS 6220

Spring 2008

Dr. Hochberg

Individual Assignment 2: Far East Trading Company

Sameer Kapadia

THE CURRENCY CRISIS IMPACT ON GLOBAL MULTI-NATIONAL FIRMS:

Budgeted financial statements of a given firm should have taken into account potential changes of international Foreign eXchange (FX) rates. In the short-run an unexpected change in the FX rates could impact the one-year operating budgets of multi-national firms in the U.S.A. and worldwide. The contracts that companies may have made for the coming financial year will have a definite impact on the planned earnings for the firm. The corrective actions can be taken immediately, but the results will not show a positive turnaround until the latter part of the year or perhaps even the following year or more depending on the impact to the firm. Furthermore, the sales prices will be greatly impacted. The high operating costs will impact the sales and the growth will seem low even if there was significant development during the financial year. Depending on the change in the FX rate, the company can react appropriately in order to compensate for the negative impact.

The long-term effects of such an event in the world market imply that the cash flows are negatively impacted beyond five years. In the case where a certain currency may fall significantly causing regional economy to enter a recession will impact firms at a global level. Regardless of the firm serving a domestic market or a global market, the FX rates will impact firms world-wide. In certain cases, many firms may not be able to take corrective actions in the short-run and may not survive. While the larger firms will put a long-term plan in place in order to recover from the crisis and display a positive turn in a period longer than five-years.

After over a decade of miraculous grown in the economic and industrial markets, the South-East Asian market plummeted with the fall of the Thai baht. The crisis trampled many businesses and revealed the weak pillars that the economy was positioned on before the Asian currency crisis. The crisis involved the following basic issues:

• The currency value and equities fell dramatically

• Inadequately developed sectors and government policies to fund troubled economy

• Worldwide effects of the crisis

The private sectors and the government firms rode the “bubble,” which caused a sudden stop in the inflow into the economy causing devastating long-term effects to the South-East Asian economy. It is necessary to understand the general short-term and long-term results on a multi-national firm before applying them to the Asian currency crisis or the Far East Trading Company (FETC).

THE SITUATION AT THE FAR EAST TRADING COMPANY (FETC):

The Asian currency crisis had burst the “bubble” in South-East Asia with the collapse of the Thai currency, the baht. The weak pillars of the private and government sectors had been impacted quite significantly. Based in Sweden, The Far East Trading Company (FETC) management was in a situation and had to fall to drastic measures to show some positive results by the second half of 1998. In November of 1997, The CFO of FETC, Jan Karl Karlsen, had to go public with a second profit warning.

As Karlsen approached the meeting room in Kuala Lumpur, his mind was focused on the three C’s: cash flow, confidence, and control. Karlsen realized that he had to look at the company from a Stockholm perspective and gain the confidence back in the management of the company. The control of the company was at stake because the currency crisis had shaken up the weak pillars of businesses in East Asia. Many flaws had surfaced due to the crisis. FETC’s bottom line was to work-out a corrective strategy to gain cash flow, thus finding a cure for the �Asian flu,’ perhaps by taking some drastic actions.

Jesper Erickson had reorganized into FETC Core Business and FETC Business. The core businesses entailed consumer products, foods segment and graphics. The rest were defined as FETC Business (timber, wool, shipping, technical, and other activities). The core business was thought of as the revenue generator for FETC. Erickson believed that the non-core businesses were no longer an asset for the company and that the segments would eventually be liquidated. Erickson foresaw using the capital in a diverse segment of the new era.

Examining Exhibit 2 in Michael H. Moffett’s Multinational Business Finance, reveals that the statements above were not completely true. The half-year report showed that the core businesses showed a greater change in sales, but the operating efficiency took away from the net profits of the company. The net sales were up 19% from 1996 to 1997; however, the operating income was down by an entire 49% from 1996 to 1997.

The non-core businesses on the other hand, were thought of as leftovers from the previous era, but were generating consistent revenue and operating relatively efficiently. Diversity was important to compensate for the new investments that the