Report on Challenges in Seeking Global Financial Capital for AgFeed

AgFeed Industries Inc. is a hog-based production company. The company is operating in China and United States. In United States the company is using its hog production system streamline the production process. The company’s focus is to make animal nutrition products. The company’s aim is to lead Chinese hog production industry. The south-eastern China population where the company is operating is business is 580 million. AgFeed came into existence due to the efforts of five young Chinese Agri-businessmen. The main product of the company was animal ration which consisted of carbohydrates and protein mixed with soybean. The company then focused on developing formulations for the life cycles of animals. The formulations helped farmers in achieving more yield and AgFeed became leader in providing good quality animal feed products and was awarded the “Green Certification” by the Chinese Government (Ahmed, Chinese reverse-merger companies draw lawsuits, 2011).

Company’s main strategy is to export its production techniques, technologies, and expertise to meet the demand in China. One of the frequently used meat in china is pork meat. It is the primary source of protein for Chinese people. The growing demand for quality pork is increasing day by day. We are serving customers in china through 5 feed mills based on hog production system. It produces additive premix, concentrates and feed. The company distribute its product through its own channel of retail stores. The stores serve over 383 commercial farmers that rely on our products. In United States the company through its breeding facilities produces 1.3 million market hogs annually. The production facilities are in Colorado, North Carolina and Oklahoma. Also, the contract-based finishing facilities are based in Iowa. In this topic we are going to discuss about the challenges the company is facing in seeking global financial capital (Hui & Lishan, 2013).

Corporate Governance Issues

            The company has faced its fair share of corporate governance related issues. Effective corporate governance demands oversight and intelligence. If the company’s leadership is not capable of foreseeing the future or what challenges, they might face it will face difficulties in seeking global financing. The board acts as a shield for the interests of its shareholders. Without an experienced corporate staff, the company is likely to face regulatory agencies, fines, being caught in different scandals which can damage the reputation of the company. There should be accountability for effective corporate governance. The system of check and balance should be followed throughout the company. Also, company should be held accountable if it follows practices that artificially rise its share prices in the best interest of shareholders and public. One of the founders Dr. Li Songyan of AgFeed Industries Inc was forced into a situation to resign from the Executive Committee of the company on February 2011. He served the company for over 15 years. AgFeed’s success can be attributed to his hard work and expertise. AgFeed was then delisted from NASDAQ and further continued its business under the leadership of American CEO. In 2011 Chinese companies faced several class-action lawsuits from Chinese based investors in China-based companies listed on US stock exchange. This happened due to the Chinese companies following a method known as reverse merger of backdoor listing. Chinese companies did that by purchasing a listed American shell company and adopting its ticker symbol. This method was adopted to avoid initial public offering (IPO) and enter into the US capital market easily. This created a chain of lawsuits and scandals by authorities and share of the companies fell by over 50 percent in mid-2011 and this trend continued throughout the year. AgFeed also reverse merged in 2006 with a shell company listed on NASDAG-managed OTCBB. After that AgFeed expanded its operations rapidly. It acquired 25 hog production farms during 2007 and 2008. The company found itself in trouble due to health-related scandals of its competitors. AgFeed was caught in this frenzy and its trading was stopped by NASDAQ in October 2011. AgFeed to save its goodwill voluntarily delisted from the exchange. AgFeed intentions was business growth and to be able to reach global audience through listing in NASDAQ. The Chinese investors revers merger frenzy and scandals played a major role in increasing the challenges for AgFeed in going global. Investors are reluctant to invest in companies that are involved in scandals. Also, company was involved in an accounting fraud which is also made the situation worse. We will now discuss challenges the company is facing.

Allegations of Accounting Fraud

            On August 2, 2011 AgFeed in a shareholders meeting stated that it wants to withdraw from registration statement filed on Form F-1 which relates to its secondary business which is animal feed. On September 1, 2011 shareholders rights litigation firm Robbins Umeda LLP began an investigation to find out breaches in the duties by one of the higher ups of the company. It included some officers and directors of the company. The investigation purpose was to identify the misleading statements and practices to deceive investors and increase the company’s share price. AgFeed then announced that a special committee has been established to investigate the accounting practices being followed in terms of purchasing assets in 2007 and 2008. The committee would also check the accounts receivable of the company relating to its animal nutrition business in China. In late 2011 the company found itself in trouble when US Justice Department’s investigation revealed potential accounting frauds particularly relating to the reverse merger of the company (China Daily, 2011). Due to this the share price of company further fell. NASDAQ halted the trading of AgFeed on 16 December 2011. This all happened due to mismanagement of accounts from 2009 to 2011. The company paid a penalty of roughly 17 million dollars for its accounting fraud. It seriously damaged the company’s reputation and made it difficult for the company to seek global financial capital. Nobody wants to invest in a company that is involved in scandals and frauds. The company lost interest of the investors due to its accounting debacles (Giamichael, 2011).

Fear of Animal Activists

            Because AgFeed business is largely based on pig meat and other animals’ meat there is a chance of animal activists to protest the practices followed by the company. If they animals are kept in an environment that is not suitable for their wellbeing than it can cause problems for the company. They can face resistance from these groups which can lead to difficulties in seeking global financing.

Intervention of Government

            Pork is the main part of Chinese cuisine and its consumption rate is very high. Pork was a dominant factor in country’s inflation index. The Chinese government at took measures to assist farmers at central, provincial and local levels to assist them in streamlining the supply process. This includes subsidies for farm expansion and insurance for breeder stock. This government intervention challenges company to follow same practices and give farmers incentives to attract their attention. If the company wants to seek global financing, it needs to implement policies that favor the farmer of the region in which the company is operating its business.

Capital Market Regulations

The capital market regulations are another big challenge for AgFeed. Company has to follow the regulations of the market it is operating in and it can affect its business structure. Regulations of capital vary from country to country. AgFeed should make changes to the structure of its organization to attract global investors. To regain the trust of shareholders and investors company should follow practices that are in line with NASDAQ and if wants to expand its operations it should merge according to the regulations and avoid any reverse merging methods. Also, it should expand its range of products to meet the demand of global customers and attract investors globally. A wide range of product portfolio will surely help company in getting global financial capital.

Cross Cultural Management

            Managing business in different cultures is another big challenge for AgFeed. Although in China the company is doing well but in US it needs to adapt to their culture to be successful in seeking capital financing. Doing meat business at large scale in a vegan country comes with its challenges. Company’s production process requires customization according to the culture of the country. If the company succeeds in making customers happy it can gain their trust and make goodwill which will in turn enable seeking the global finance the company is looking for. AgFeed should incorporate an accountability system throughout the organization to avoid accounting frauds and other scandals. The leadership should be held accountable for the practices that hurt the reputation of the company. Also, the company should follow practices that consider the health of animals and their wellbeing to avoid attention of animal activists. The hog industry main challenge is to manage the health of hogs. If the animals are healthy the meat produced will be of quality nature which is critical for the company to be able to sustain its business for long term. Quality is the key for AgFeed to remain dominant in the market.

References of Challenges in Seeking Global Financial Capital for AgFeed

Ahmed, A. (2011). Chinese reverse-merger companies draw lawsuits. New York Times.

Ahmed, A. (2011). Chinese stocks plummet on news of Justice Department inquiry.

China Daily. (2011). US to close stock regulation loopholes. China Daily.

Giamichael, J. (2011). Monitored Company Profile: AgFeed Industries Inc. Global Hunters Securities.

Hui, T. K., & Lishan, Y. (2013). AGFEED INDUSTRIES INC - FROM REVERSE MERGER TO REVERSAL OF FORTUNE. Nanyang Business School, 2-25.