The Multinational Finance Function

CHAPTER 19 The Multinational Finance Function 741
providers of such schemes (such as law firms and public accounting firms), as well as going after the cor-porate clients that are adopting such schemes. In addition, they and other OECD countries are going after tax-haven countries and trying to break down the barriers to bank secrecy so that they can get access to the records of individuals and companies who they suspect are illegally avoiding taxes. As companies establish strategies to take advantage of tax havens, they need to make sure that they are very careful to avoid strategies that will turn them into the next Enron or Parmalat. The move to drive down costs can’t come at the expense of the future viability of the company. The explosion of information and technology and the growing number and sophistication of hedging instru-ments (financial derivatives such as options and for-wards) will significantly influence the cash-management and hedging strategies of MNEs in the future. Advances in information systems will continue to enable compa-nies to get information more quickly and cheaply. In addition, electronic data interchange (EDI) will allow them to transfer information and money instanta-neously worldwide. Companies will significantly reduce paper flow and increase the speed of delivery of information and funds, enabling them to manage cash and use intercompany resources much more
effectively than before. Consequently, companies will reduce not only the cost of producing information but also interest and other borrowing costs. Investment and commercial banks will continue to develop new derivative instruments that will help companies hedge their currency and interest-rate exposures in the short and long term. However, new standards in accounting for derivative financial instru-ments by the FASB and IASB will force companies to mark most derivatives to market and recognize gains and losses in income. Despite of the tightening of accounting standards, derivatives will be a big help to companies as they attempt to hedge their cash flows and protect against the erosion of earnings in an unstable financial environment. The OECD, the IMF, and the EU are three institutions that will help countries narrow their tax differences and crack down on the transfer of money for illegal pur-poses. Although illegal financial transfers have occurred for years, especially due to drug trafficking, the attacks on 9/11 and subsequent moves to track down money laundering by Osama bin Laden and other terrorists have created a more urgent need to reform the global financial system. This will continue to narrow the options of companies to move funds, but that isn’t a bad idea.
DeD M9-cosur: Pc.r-:d in Brazil
n 2009, Dell announced that it was moving aggressively in Brazil by significantly ramping 11 up its product line that will be sold in retail stores and customizing products specifically for Li the Brazilian market. Only two years after deciding to sell computers in retail outlets, Dell is focusing on Latin America—where 10 percent of its retail outlets exist—and Brazil is the key to its Latin American sales. With the Brazilian economy rebounding from the global economic crisis and the Brazilian real relatively strong against the U.S. dollar, the future looked bright for Dell’s business in Brazil. Agreements with supermarket giants Carrefour, Wal-Mart, and Ponto Frio (a local Brazilian company) should give Dell significant retail space to expand its market. However, things haven’t always been that smooth. Travel back in time to 2002. Todd Pickett, CFO of Dell Mercosur, was facing the end of 2002 with conflicting predictions of the value of the Brazilian currency (the real) and what to do to hedge Dell’s operation in Brazil.42 Although Pickett was concerned about Dell’s exposure in the other MERCOSUR countries—especially Argentina—Brazil was clearly the largest concern. The year 2002 began with the shocks resulting from the Argentine financial crisis, which started at the end of 2001, and it ended with the election in October of Luiz Inacio Lula da Silva (known simply as “Lula”) as president of Brazil. Lula, the leader of the Workers’ Party and a longtime leftist politician, had held the lead throughout the year. The markets were skeptical of Lula’s potential leadership, a factor that caused the real to weaken from 2.312 reais per U.S. dollar at the end of 2001 to a record four reais to one U.S. dollar at one point just prior to the election. After the election, the real began to strengthen somewhat, but