Risk Analysis on Investment Decision

Essay by tbaby103694University, Master's December 2009

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University of PhoenixSilicon Arts, Incorporated (SAI) manufactures digital imaging Integrated Circuits (IC) that are used in various electronic equipment (University of Phoenix Simulation, 2008). The company‘s initial startup occurred during the boom of the semiconductor business, but the revenues eventually decreased by 40% (University of Phoenix Simulation, 2008). SAI survived by cutting costs and freezing capital expenses. Currently, SAI’s Chairman, Hal Eichner, wants to invest in a project that will increased the company’s market share and keep ace with new technology (University of Phoenix Simulation, 2008). SAI has two different opportunities to maximize shareholders wealth.

Silicon Arts, Incorporated (SAI) has to analyze whether it would give the company a competitive advantage to acquire W-Comm. The acquisition would be considered an external investment strategy. According to Ross, Westerfield and Jaffe (2005), there are three legal ways to acquire a firm 1) merger or consolidation, 2) acquisition of stock, and 3) acquisition of assets (par.

797). The acquisition of W-Comm would be a merger that will be incorporated into Silicon Arts as a conglomerate acquisition because they are non-related industries (Ross et al, 2005, par. 797). The acquisition of W-Comm gives the company a competitive advantage of entering the wireless communication market, revenue enhancement, market gain, cost reduction, tax gains, and reduction in the cost of capital (Ross et al 2005, par 802-806). However, there are disadvantages in acquisition through a merger.

The conglomerate acquisition of W-Comm has the risk of SIA producing lackluster financial performance due to the lack of expertise and knowledge of the industry. The shareholders stock may be reduced. According to Ross et al (2005), “ … two firms merge, the variability of their combined values is usually less than would be true if the firms remained separate entities … shareholders are likely to be worse off [because]...