Page 2 - SCS May 2018 - Day 2 Suggested Solutions

CIMA MAY 2018 – STRATEGIC CASE STUDY

Another strategic benefit is that Couchweb would be more diversified as a business. At present
we stream movies and TV programmes, and are wholly dependent on that market. This would
seem to be reasonably high business risk; if demand for our services were to drop (for example,
due to further technological development), we would not be protected in any way. However,
there will always be demand for TV programmes and movies, regardless of the delivery
mechanism to the viewer, and becoming a production company as well as a broadcaster would
insulate Couchweb to a degree from that risk.

Finally, it should be pointed out that Couchweb has made acquisitions in the past. Such deals tend
to have a degree of risk; the buyer may pay too high a price, and the anticipated benefits fail to
materialise once the deal has been completed. It should be pointed out at the Board meeting that
Couchweb’s experience in such matters reduces risk in both areas.

Risks

There are also a number of risks that should be highlighted.

Firstly, buying MM is likely to be expensive. The apparent interest of HomeVideo may well result
in a bidding war between our two companies; indeed, there may be other broadcasters who enter
the process once they realise that MM is up for sale. In such instances it is easy to lose sight of
value, and end up paying too high a price as commercial logic is replaced by corporate ego.

Secondly, there is the question of consideration – how will the deal be financed? Whilst
Couchweb has almost $2 billion of cash at present, this has most likely been earmarked for other
purposes. $4.5 billion will be needed to pay off immediate liabilities over the next 12 months; long
term debt will need to be financed; and there is on-going demand on cash for investing in new
content and research and development in technology. Therefore paying much of the
consideration in cash would seem inappropriate.

Couchweb could raise further equity (such as a share for share exchange) or new debt (a debt for
equity deal) to pay for the shares in MM, but the reaction of our current investors would need to
be gauged. Couchweb has issued both types of finance in the last year; appetite for further issue
of either debt or equity may be low. Investors would need to be convinced that the deal
represents great value for them to be prepared to accept it.

Thirdly, an acquisition can prove to be a great distraction for the management teams of both
buyer and seller. If the deal were to be protracted, it could lead to Couchweb taking its eye off its
main area of business. In a highly competitive industry, this could lead to losing competitive
advantage.

Finally, MM is currently a great business due to the talent that it employs. Writers, directors and
actors may decide to leave that company if they feel that, post-acquisition, it is no longer an
attractive place to work (for example, if they feel that their artistic abilities are being limited in
some way). This would mean that Couchweb would effectively have bought a business that has
immediately fallen in value, i.e. a bad deal! Care will need to be given to ensuring that the
interests of key staff at MM are understood and addressed.

58 KAPLAN PUBLISHING