Hutchinson Wampoa Case Study

Hutchison Whampoa

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Hutchison Whampoa

This paper contains a rough draft of the evaluation of possible alternatives that Hutchison Whampoa can use to solve problems in capital budgeting. Hutchison Whampoa is a merger established in 1997. The merger is well diversified offering a wide variety of products and services in China and Asia as a whole (Pederson, 2007). Some of these include port and related services, offering retail services at supermarkets where electronics and households goods are sold, telecommunication services as well as selling and leasing of commercial properties. Currently, Hutchison Whampoa face financing problems to be able to complete and maintain the above projects. The company is met by a couple of bottlenecks when it comes to loan financing. These are long-term nature of some of their projects which cannot be serviced by short term financial arrangements, policies adopted by commercial banks limiting the amount of loan that can be advanced as well as statutory constraints limiting the loan limit that Hutchison Whampoa can obtain from banks. To raise the excess of $ 5 Billion, Hutchison Whampoa has a number of alternatives available to raise capital.

Alternative number one is borrowing from banks through syndicated bank financing. This option is however not sufficient for Hutchison Whampoa since banks apart from having loan limitations, offer only 5 yearlong loans term. Hutchison Whampoa require ten year financing. The second alternative was offering the remainder of 51.1 % of their equity shares to the public as equity shares. Exhibit 12 and exhibit 13 shows the company’s history of shares prices and P/E ratios. This alternative was highly recommended since it would increase the popularity of the company. Thirdly, Hutchison Whampoa was presented with an option of issuing bonds locally and internationally to raise the excess funds. Since bonds in Hong Kong were only issued at a 20 year maturity period, the company was forced to resort to the U. S money market. Then it was forced to adjust their financial statements to be in line with the GAAP rules (Holland & Torregrosa 2008). This proved rather procedural and speculative. Another option was the use of straight debt from the Hong Kong market. As for equity, this needed not restructuring of any financial statements as for the case of use of bonds hence efficient. However due to dumping of the Hog Kong Dollar market by PRC borrowers, the cost of debt increased considerably hence posing a deterrent to Hutchison Whampoa using straight debt to finance its capital needs. Back then, the Eurobond market was fast growing due to increasing number of multinational borrowers (Choudhry, 2010). The market targeted fast growing markets such as the Hong Kong market as depicted by exhibit 14. As such, Hutchison Whampoa found this method efficient to raise the additional capital requirements.