Silicon Arts Risk
Risk often occurs without success but rarely does success occur without risk. However, risk analysis can mitigate some risks. Silicon Arts, Inc. is contemplating a new venture. Before proceeding, they should are evaluating financial and operation risks.
Risk 1: Long-term growth
In an acquisition there is always the risk that immediate profits will be deemed more important than long-term growth. Shareholders seek an immediate return in the dividends and CEO’s seek bonuses. Tim Ranzetta, President of Equilar, notes that “empirical research seems to indicate that most companies underperform relative to the market after a merger while executives benefit from large, one-time payouts” (Morgenson, 2004). Investors and CEO’s alike assume that the immediate profits will continue forever and mature into long-term profit Although immediate profits, cash flow are also acceptable, longevity is more important (Ross, 2005, p.166).
To mitigate the risk of endangering long-term growth in a merger utilize capital rationing. Capital rationing is “the act of placing restrictions on the amount of new investment undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on the specific projects” (Investopedia, 2008). In the case of the W-Comm proposal, capital rationing will be utilized to mitigate the risk by using the excess space in the Santa Clara plant for 3 years, after which a new Sunnyvale facility will be funded with a capital outlay of $18 million. Delaying the funding of the new facilty, the company has more time and resources to complete existing projects. Capital rationing is determined by the amount of projects that a company has going, the NPV of the company, and the top management’s philosophy.
Risk 2: Bias
Bias is part of all decisions, including capital budgeting decisions. “The human mind has adapted to shortcuts in...
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