Ciba-Geigy AG Case Solution

Introduction

Ciba Geigy is of the largest multinational Swiss Industry company. As per the tradition of board meeting, the four divisions of Ciba Geigy provided their budget for 1988. However, as far as the budgeting is concerned, 1987 was the year of stock market crash and uncertainties. The chairman was concerned about this issue and prepared to presentits impact on the international competitiveness, inflation, financial reporting issues and the most importantly the impact of currency changes on the company.

The company is worried about the financial management issues and the ways to protect its profit from the adverse currency movements. This has been the critical issue as there was a large currency movement that has affected the profits and the position of the company recently. In the analysis, we will consider how critical these issues are and what are the possible solution to the scenario.

Problems

The budgets for the next year were presented in the board meeting held by the four divisions. All of the divisions were very optimistic regarding their budget, and expected significant increase in sales and divisional contribution. However, when these budgets were incorporated with of the Swiss franc budget, it turned to be the third year of consecutive declining profits. The reason behind this was the strengthening of Swiss franc budgeted exchange rates. Specifically in terms of dollar, the 10 cent decline in dollar exchange rate resulted in a decline in profit of around 100 million Swiss francs.

The currency risk fluctuation gave rise to the other issues that were almost equally crucial for Ciba Geigy. First, the competitive position of the company was at stake. It was unclear that whether the company would be able to compete in the world market even after the strengthening of Swiss franc because most of the major operations of the company are in America. The question was to whether the company would be able to maintain its competitive-ness or it needs to relocate its manufacturing to USA.

The company is considering protecting its financial statements for the adverse currency movements. In late 1980s, the dollar strengthened and therefore, Ciba Geigy was able to generate high level of sales revenue and profits. Although the company has been growing rapidly, however, the adverse currency fluctuations had made the company a poor performer in the eyes of public at large and the employees.

Analysis

As in the case, the currency of Swiss is strengthening, this is the home currency of Ciba Geigy and most of its revenue is generated from USA and other regions. For the accounting purpose, all of the financial statements are needed to be translated in the home currency. During the past three years, the Swiss franc has strengthened against the dollar and therefore, the sales in terms of dollar when converted to Swiss franc show less value than its worth in the America.

Similarly, if we consider the case that the profits are send to America and consolidated there. It would show as if the company is quite profitable and which is the actual situation of Ciba Geigy at the moment. As in 1979, the Swiss Franc to US dollar exchange was Swiss Franc 2.06/$, in the same year the profits were significantly high resulting in an impressive consolidated financial statement. However, if we talk about the recent year 1986 where the exchange rate is Swiss Franc 1.76/$ showing the Swiss currency has strengthened. Although in economic terms that is a good sign for any country, however, since most of the revenue stream of Ciba Geigy comes foreign country and then consolidates in the home country, the value of profit declines. The reason was not the inefficiency of management of management as this can be indicated by the fact that the company was continuously growing from 1978 to 1985 until the currency rate for Swiss started to rise as shown in Exhibit 7.

One of the consequences of declining sales of Ciba Geigy would be that the employees and public may feel that the company is not performing well since its profits are declining continuously in each of the three previous years. The people are more concerned about the financial figures rather than other non-financial elements……………….

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Ciba-Geigy AG Case Solution
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