Dr. P.V. Viswanath
|Courses/ FIN 649|
SCHOOL OF BUSINESS
Media articles and short conceptual questions on Operating Exposure, Transactions Exposure and Capital Budgeting in an International Context.
1. (15 points) "Read the article below, "China, U.S. Steelmakers Forge Ties," from the Wall Street Journal of July 10, 2006 and answer this question:
What rationale for the merger has been given in the article? Comment on it in the context of the theories discussed in class.
Is this a merger? Is this a horizontal, vertical or conglomerate merger?
Wuhan Iron Sets Deal
BEIJING -- Wuhan Iron & Steel Corp. has signed a $100 million deal with a Missouri-based specialty steelmaker to tap into China's building and energy boom.
Wire Rope Corp. of America will own 51% of the new joint venture, which will produce cables used in bridges, cranes and mining -- as well as on oil rigs to lift drills.
The two companies plan to build a one million-square-foot (90,000-square-meter) plant to be located in the central Chinese city of Wuhan, in Hubei province. The plant will be able to produce 50,000 metric tons a year when it becomes fully operational in about 18 months.
"We realized the Chinese market was fed by imports or local products which are not up to standard. The market was really wide open," said Ira Glazer, chief executive of Wire Rope, which is among the world's largest producers of the product.
Mr. Glazer said he hopes to double capacity within a few years, and thinks sales could reach $500 million a year.
The deal follows in the footsteps of Mittal Steel Co., which formed the first Sino-foreign joint venture in China's steel industry last fall with Hunan Valin Steel & Iron Group.
Privately held Wire Rope was purchased by KPS Special Situations Funds, a turnaround specialist, more than three years ago. The company also has plants in Mexico.
For Wire Rope, the alliance offers several advantages, including preferential access to cheap raw materials from its Chinese partner, cheap labor and a closer connection to a market that it expects to expand 7% a year.
China's steel sector is the midst of a punishing domestic price war because of overcapacity in the steel sector, especially in lower-end products, even as the price of iron soars. Chinese companies have met strong resistance to attempts to export more as foreign companies accuse the Chinese of dumping.
At the same time, China imports many more complicated products such as wire ropes, which can be fitted with sensors for use in specialty tasks such as drilling on oil rigs.
Wuhan Iron & Steel sees the joint venture as a way to differentiate itself by being able to bring in better technology, especially as pressure mounts for consolidation in China's steel sector. The government has said it wants the country's 10 biggest steel producers to control 70% of the market by 2020, and wants to cap steel production through 2010 at 400 million tons. China is the world's biggest producer and consumer of steel.
"We needed to get in touch with an American company and brand; we needed to expand our capacity and technique," said Zhou Minhua, general manager of the wholly owned Wuhan subsidiary that is handling the deal.
Is the risk here diversifiable? Country risk? Currency risk? Commodity risk?
Can you interpret this as diversification of operating exposure?
2. At 10:09 p.m. on June 14, 2006, the following rates were shown on http://www.ozforex.com.au.
The EUR/USD forward rate for 3 months was
The GBP/USD forward rate for 3 months was
According to Bloomberg, on the same date, the yield on 3-month US T-bills was 4.88%, on 3-month German bills was 2.86% and that on British 3-month bills was 4.5%.
3. Answer any four of the following questions: