Hulk and Chipcat Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Hulk and Chipcat Case Study Solution

Introduction- Hulk:

Hulk is one of the technological firm involved in manufacturing electronic gadgets for home entertainment systems. Hulk focuses on maintaining quality to create and uphold market reputation allowing it to gain an edge over its competitors. Hulk’s way to maintaining quality is heavily dependent upon its policy of using selective and recognised suppliers.

Hulk also have an advantage of having quick responses to various situations arising in the market as seen in its ability to stay on top of its competitor Massive Ltd. Hulk’s careful screening of supplier and upholding quality also creates several disadvantages for the company including increasing its debt.

Introduction- Chipcat:

Chipcat is a micro-chip manufacturer, whose components are used in various technological instruments. Chipcat provides high quality microchips enhancing competition for its acquisition. However,Chipcat too is having heavy debt problems. Furthermore, its division in operations may lead to decline in quality as seen from loan forwarded for a specific purpose.

Analysis:

Hulk needs to maintain market reputation to enhance its company’s profits. For that, it is willing to go to any means to protect its base of microchip supplies. As hulk is heavily dependent on supplies the focus shifts to Chipcat; a quality microchips supplier. This leads to increase in competition between Hulk Ltd and its rival Massive Ltd. In order to outdo each other both this firms went all out to gain control over Chipcat.

In retaliation to Massive’s design to gain control over Chipcat, Hulk purchased shares to acquire up to 47% of the Chipcat. This enables them to appoint 4 members to Board of Directors of Chipcat. It further gained an option to buy shares in future enabling them to take their share of the firm to 51%. Even though this has effectively proven to deter Massive from gaining control over Chipcat, it did not prevent Hulk from going into adebt spiral.

On the other hand, Massive found a loophole in Hulk’s bid to take over Chipcat by contracting the micro-chip firm to enter into a loan contract with them. This effectively puts both Hulk and Chipcat under the intense pressure of debt. It may further limit their ability to raise any more loans or issue any more shares. Furthermore,it will also affect the consolidated financial statements of the entities, should Hulk decide to exercise its call options before 2016. According to the contract between Massive and Chipcat, the micro-chip company will have to focus a part of its resources only for Massive’s use and production. This means that even if Hulk manages to acquire Chipcat, it will have to ensure that its rival is well supplied as Hulk will be indirectly responsible for the ful filment of contract by virtue of being Chipcat’s parent company. If a specific plant is only dedicated to producing chips for Massive, then it will impact Hulk negatively. For a short time, it looks like Hulk will have to face stiff competition with already outstanding debts.

To finance its proposed takeover bid of Chipcat, Hulk will have to raise a significant amount of cash and what better way to do that than through loans. It already has a liability through the purchase of long term bonds and other unsecured notes. It will have to further deal with increased rivalry from Massive who looks to have the upper hand in the current scenario.

Long term predictions can also be made though. With there payment of a loan from Massive, Hulk can gain an advantage of controlling the whole micro-chip firm and can bring its focus to one supplier instead of many.

This will have many advantages for Hulk Ltd:

Hulk will be able to increase its area of operations and gain revenue from other businesses merged with it.
Hulk can concentrate more effectively on given tasks, instead of relying on suppliers who may or may not be able to meet the requirements of Hulk. At least with owning the micro-chip firm for itself creates an advantage of moulding Chipcat in any way it wants to.
With production process being consolidated into one part, Hulk will be able to achieve the desired level of quality of its products.
Hulk can increase its revenue further by taking advantage of diversified products including selling micro-chips to other companies in same industry.
Perhaps the greatest advantage available to Hulk can be obtaining economies of scale, hence reducing its overall cost and taking on competition.

Even though it can gain many advantages from the acquisition of Chipcat, Hulk will have to think about short term consequences and feasibility of take-over. Possible problems that can occur in the short term can be

In the case of Hulk and Chipcat goodwill is highly technical area because it is still uncertain whether Hulk will exercise its call options or not. It can lead to two scenarios:

Where acquisition takes place: in which case after merging the financial statements and preparing consolidated results goodwill will be calculated and reported in the statement of financial position. The goodwill calculated is $38358 (refer to excel working in sheet 4).
Where Hulk does not exercise its call options: only 47% of the profit of Chipcat will be included in its financial statements as dividend receivable; which is equal to Hulk’s interest in Chipcat.

In case acquisition takes place goodwill will be recorded in the consolidated statement of financial position. It will be recognised from 2013 when first acquisition was made and shall be amortised over its useful life.Furthermore, if the life of goodwill is only 3 years then the amount $38358 shall be amortised over 3 years, and the resulting entry would be....................

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