Mezza Co is a large food manufacturing and wholesale company.It imports fruit and vegetables from countries in South America,Africa and Asia,and packages them in steel cans,plastic tubs and as frozen foods,for sale to supermarkets around Europe.Its suppliers range from individual farmers to Government run cooperatives,and farms run by its own subsidiary companies.In the past,Mezza Co has been very successful in its activities,and has an excellent corporate image with its customers,suppliers and employees.Indeed Mezza Co prides itself on how it has supported local farming communities around the world and has consistently highlighted these activities in its annual reports.
However,in spite of buoyant stock markets over the last couple of years,Mezza Co’s share price has remained static.It is thought that this is because there is little scope for future growth in its products.As a result the company’s directors are considering diversifying into new areas.One possibility is to commercialise a product developed by a recently acquired subsidiary company.The subsidiary company is engaged in researching solutions to carbon emissions and global warming,and has developed a high carbon absorbing variety of plant that can be grown in warm,shallow sea water.The plant would then be harvested into carbon-neutral bio-fuel.This fuel,if widely used,is expected to lower carbon production levels.
Currently there is a lot of interest among the world’s governments in finding solutions to climate change.Mezza Co’s directors feel that this venture could enhance its reputation and result in a rise in its share price.They believe that the company’s expertise would be ideally suited to commercialising the product.On a personal level,they feel that the venture’s success would enhance their generous remuneration package which includes share options.It is hoped that the resulting increase in the share price would enable the options to be exercised in the future.
Mezza Co has identified the coast of Maienar,a small country in Asia,as an ideal location,as it has a large area of warm,shallow waters.Mezza Co has been operating in Maienar for many years and as a result,has a well developed infrastructure to enable it to plant,monitor and harvest the crop.Mezza Co’s directors have strong ties with senior government officials in Maienar and the country’s politicians are keen to develop new industries,especially ones with a long-term future.
The area identified by Mezza Co is a rich fishing ground for local fishermen,who have been fishing there for many generations.However,the fishermen are poor and have little political influence.The general perception is that the fishermen contribute little to Maienar’s economic development.The coastal area,although naturally beautiful,has not been well developed for tourism.It is thought that the high carbon absorbing plant,if grown on a commercial scale,may have a negative impact on fish stocks and other wildlife in the area.The resulting decline in fish stocks may make it impossible for the fishermen to continue with their traditional way of life.
Discuss the key issues that the directors of Mezza Co should consider when making the decision about whether or not to commercialise the new product,and suggest how these issues may be mitigated or resolved.
(Solution note:Question 5 can be answered in a variety of ways and the suggested answer below is indicative.Credit will be given for reasonable answers considering alternatives or additions to the two issues discussed below.)
The directors’overarching aim should be to maximise Mezza Co’s long-term value and thereby maximise the value to its shareholders.Hence any decision should be made with this aim as the primary objective.However,the directors should also try to minimise the negative consequences resulting from the implementation of the project,taking into account the company’s responsibility to its stakeholders.
The first key issue to consider is whether the new project would add value to the company.Initially it would appear that the investment into the new venture may be beneficial to the company.The product would be meeting market needs for a substantial period of time,as a tool in tackling climate change.It would possibly enhance the company’s corporate reputation in helping to tackle the negative impact of climate change.Furthermore,it may enable the research subsidiary company to undertake future research and development projects in similar products.
However,whether the positive factors described above lead to an increase in the value of the company warrants further discussion and investigation.The company needs to assess the likely income the investment will generate and take account of the inherent risk of the venture.Presumably this is a new product and therefore it is likely that the uncertainty and risk to income flows will be significant.The directors should also take account of the fact that their remuneration package contains share options and these may induce them to act in an overly risky manner,where they would benefit from increasing share prices but not lose if the share price falls.This may not be beneficial to the shareholders or other stakeholders who do not hold such options.
Due diligence procedures for the project need to be undertaken before the decision is made.The company’s directors need to undertake a full assessment of how realistic the estimates of revenues and income are likely to be.They would also need to assess the likelihood of competitors and alternative products which may affect the future sales of the product.A full investigation of the uncertainties and risks needs to be undertaken,possibly using techniques such as sensitivity,probability and project duration analysis.Risks need to be accounted for in the assessment of the likely value added.This would be of particular importance if the directors are to convince the shareholders and other stakeholders that they are not taking unacceptable levels of risk.Realistic time scales need to be determined of how long it would take to commercialise the product,perhaps by considering how other companies undertook similar projects.The adequacy of the expertise and infrastructure required by the company needs to be assessed.
The second key issue for the directors to consider is the location of the plant product.There are a number of factors which would make the location ideal for Mezza Co.The location provides the ideal conditions for the plant to grow in the quantity required for commercialisation.The relationship with the government is strong and the government wants to develop new industries,hence the project is likely to be seen in a positive light.It is possible therefore that many legal and administrative barriers would be reduced to enable production to commence quickly.Finally,Mezza Co has the infrastructure it needs in place and therefore set-up costs are likely to be significantly lower.These factors would provide financial benefits for Mezza Co and may make the investment viable.
However,there are ethical and environmental concerns in using this area for the project.It may be perceived that the relationship with the government is too close and this will prevent proper scrutiny by the government.The livelihood of the affected fishermen needs to be considered,as well as the impact on the wildlife and the environment.Going ahead with the project may result in a significant negative impact on Mezza Co’s reputation and possibly contradicts with the company’s(and the directors’)values.Therefore,the dilemma that the directors face is that the project would be perceived as helping the global environment but damaging the local environment.
The directors could take a number of steps to reduce or eliminate this negative impact.Given that the fishermen do not have a significant‘voice’or power,Mezza’s board could try to hide the issue,but it is unlikely that their personal values would allow such a situation.The directors could speak with the leaders of the fishermen’s community to explain the benefits and consequences on the fishermen,possibly offering the fishermen priority to the new jobs that the project would create.They could influence,and work with the government,to part-develop the area for tourists and also leave areas for the fishermen to continue their activity.This may be possible if the whole area is not needed for plant cultivation at once.These additional wealth enhancing opportunities may convince the fishermen of the merits of the project.The company could continue looking for alternative areas to cultivate the crop and possibly engage in research and development to create crops which are not harmful to the fish stock and the wildlife.However,these steps would cost money and Mezza Co needs to balance revenues it is likely to receive against the additional costs.
In terms of the relationship with the government,Mezza Co may be able to demonstrate that it worked with the government to improve the livelihood of the fishermen.It could also ensure that it follows due process in terms of legal and administrative requirements,even though this would possibly delay the product’s launch.
Mezza Co needs to consider the likely positive benefits against the costs,both direct and to the wider community,before taking on the project.It needs to consider the impact on long term value creation,and corporate reputation would be a major factor in determining this.Although Maienar’s government may try to approve the project quickly,Mezza Co should consider the full impact of the proposed project,alternatives and consequences,and try to manage the entire process to ensure that there isn’t an overall negative impact on the company’s reputation.