Aspen Tech case study Essay

History and everyplaceview Specialized in the development of simulation parcel for customer in process manufacturing industries Advanced System for Process engineer (ASPEN) project conducted at the Massachusetts Intitutes of Technology (MIT) in Cambridge Massachusetts, from 1976 to 1981 Founded in 1981 by Dr. Larry Evans, a professor of chemical engineering at MIT Larry Evansleadership in the development and application of integrated systems for modeling, simulation and optimization of industrial chemical processHistory and Overview In 1982 its first year of operations, AspenTech lost USD565,000 on sales of USD182,000 Over next 13 years AspenTechs sales grew rapidly as it became a major payer in the process simulation segment of the software package industry. 1995 association earned net income $5.4 million on sales $57.5 million. AspenTech estimated that it commanded 50% of thesimulation market for chemical sector. 1995, it employed 417 people of which 265 ware based in the US and the remainder in office in 5 countries.History and Overview AspenTech went public in USDD31 million IPO which included a USD 18 one thousand thousand primary offering and USD 13 Million tributary offering to finance further R&D to acquire extern whollyy developed technologies to allow advance(prenominal) investors to monetize their holdings in the company, Feb1995, Aspentech conducted a $23 million public offering, which included a USD 1 million primary offering and USD 22 million secondary offering. 1995, AspenTech was the only one of the firms that specialized in simulation programs for chemical petroleum, and petrochemicals industries that was publicly traded.Products (versi makalah)Aspen PlusAspen Plus is the most popular producta steady ground modeling system built around the core technology This product accounted 48% of sales in 1995Speed UPIt was AspenTechs dynamic process modeling productcommercialized in 1986 by Prosys Tecknology that AspenTech purchased in 1991Max It is a less powerful version of Aspen PlusAdventA software to optimize the tradeoff between capital expenditures for energy saving heat counterchangers and the energy saving realizedProduct Portfolio (versi makalah) Properties PLUSIt is a database of chemicals properties underlying its some other products, popular with customers developed in-house modeling software Other modules offers to the customers license separately use with its other products to model subsystems used in highly specialized chemicals treat application.Product Portfolio (versi web)Process EngineeringProcess simulation Chemicals (10 products AspenPlus)Process simulation Oil&Gas (8 products AspenHYSYS)Process simulation Refining (11 products Aspenadsim+)Process simulation down/Pharma (8 products Aspenproperties) Model Deployment (3 products AspenModelrunner)Equipment modeling (8 products AspenAcol+)Basic Engineering (2 products AspenKbase)Economic Evaluation (3 products Aspn Icarus Project Manager)Advan ce Process Control (14 products Aspen Apollo, Aspen IQ)Planning & Scheduling (10 products Aspen Advisor, Aspen MBO)Supply & distribution (3 products Aspen Retail)Production Management & Execution (16 products Aspen 0server)gross revenue & Marketing1995, licensed to more than 450 companies chemical industry and 350 univeritiesThe selling cycle for process modelling software was yen (6-12 months)AspenTech charged a premium over competitors products, raise licensing fees three times (1998-1995)10%Customer loyalty Over 90% renewed their software 1994 34% revenue from software renewal 34% from expansion from existing customerjoined States Directs sales force Earned combination of salary & commissionSales subsidiaries UK, japan, HongKong, Brussels Serve local & regional markets via directs sales forcesLicensed software for a non-cancelable term 3 or 5 yearsCharge annual fee x license term (year) Interest rate 9.5% 11% currently 12%Customer were more likely to buy software pr iced in local currency risk Exposure1. extraneous Exchange lay on the linesell software in local currenciesinstallment from three-to-five years creates foreign exchange exposure exchange rate fluctuations52% revenue generated from foreign company with following revenues figures Europe 31%Asia 12%Other countries 9%In United State 48%.Risk exposure are might be applicable Transaction Exposure (High)most the costumer operated outside of US interpreting Exposure (Low)convert foreign currency financial statements into a single currency (USD).Risk Exposure2. Interest Rate Risk (low) AspenTech debt using US dollar currency fix interest rate and mid term (3years) place a seasonal line-of-credit facility with a New England BankRisk Exposure3.Credit RiskCredit risk (default risk) in high exposure level2 sources prospect trigger this riskgrowing rapidlycustomer choose to defer payment of their license over the life of the contractEx AspenTech was liable for $ 4,6 million of this amount unde r limited resort agreementUnwilling (Low)most of the customers are a loyal customerUnable (High)depend on the type of business of customerLiquidity Riskmany of its customers chose to defer payment of their licenses over the life of the contractthe company usually experienced an operating cash shortfallEx the firm book revenue of USD57.5 million, yet receive cash payments directly from customers of only $38.5 million (66.96%).Management Risk Perform by AspenTechForeign Exchange Riskeliminated all sales transaction exposure arising from foreign currency denominated license contract inline with its risk management policy by doing hedging Sale non USD installment due for USD forward currency agreementCredit Risk AspenTech has non managed the risk of the uncollectible installment The contract with GE and Sanwa in selling the account due has limited recourse agreementLiquidity Risk To manage its liquidity risk in order to cover their day to day operation, AspenTechsell its receivabl e to GE and Sanwa and other financial institution. AspenTech also has debt to Massachusetts Capital Resources placed a seasonal line of credit facility with New England bank. good wordAspenTechs should reexamine the firm risk management policies and practices in light of the changes over the past year AspenTechs international sales had remained a substantial administer of its revenues the firm international expenses had increase a slightly faster rate than its international revenue AspenTech had gone from private company into a publicly traded companyAspenTechs should review and determine an acceptable level of risk. It involves determining reasonable level of risk in-line with appropriate opportunity to gainRecommendationNet Foreign Exchange Exposure (Operational Hedging)AspenTechs Value at Risk, 1995 (95% confidence level)UK PoundGerman DMBelgian FrancJapanese YenExpenses in localcurrency3,129722158,223414,793Monthly Std.Deviation2.90%2.80%2.70%3.00%ExchangeRate*1.58730.67110.0 3260.0106Total*Average exchange rate (U.S. dollar per unit of foreign currency) over fiscal year 1995var$23822230218$707AspenTechs Net Foreign Exchange Exposure (000) by Currency, 1995 Cash InflowsUK PoundGerman DMBelgian FrancJapanese Yen flowing Sales1,7241,015308,984Prior Sales981577175,781Cash OutflowsExpenses3,129722158,223414,793AspenTech should hedge only the net exposure Net foreign exchange exposure in German and Japan Forward contract for Belgians operating expenseNet Exposure(424)870(158,223)69,972RecommendationLiquidity & Credit Risk AspenTech should look other possible action to deal with other financialinstitution to increase their bargaining position to GE and Sanwa With higher bargaining position, AspenTech can get lower cost and break position in managing their credit risk Maximize in selling long term receivable firstRecommendationOthers Hedging Instrument Plain-Vanilla Options croak the buyer of the option the right but not the obligation to buy (call) or sell (put) a specific amount of currency at a predetermined strike price (exchange rateHigh cost Average-Rate Options Spot rate are calculated as an average over a check Transaction possible during the expiry period at several predetermined dates Strike rate can be fixed or floating Knock-in/knock-out Options Does not provide full protection The key is in determining the barrier rate Low cost Cross-currency transactions Foreign currency money-market borrowingRecommendation Others Hedging Instrument Cross-currency transactions transaction basically does not provide ability to hedge or secure any risk provide probability of arbitrage if there is a difference between cross rate and indirect rate. Foreign currency money-market borrowing Borrowing in the money market, quite difficult to use since the company need to determine level of debt that matched with its cash inflow from other matched currency