Page 5 - CIMA SCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – STRATEGIC CASE STUDY

This is important, as it can be seen as a potential dilution of shareholder interest.

The consideration (i.e. the price paid to enter the deal) in a merger is usually a share-for-share
exchange, although cash can be used if there is a significant difference in values.

Leadership

A Board of Directors will need to be formed for the merged entity. Key questions will need to be
answered, such as who will be the CEO, the Chairman, other Executive Directors etc. It is unlikely
that all the directors from the separate entities will be required in the merged company, and
therefore the issue of job security comes to the fore.

As you have been with Vita since its inception, you may naturally feel that you should continue as
CEO of the merged company, but your counterpart at Funfitt may be expecting the same for
himself/herself.

Influence

At present, you will own a certain percentage of the issued share capital of Vita; this will reduce as
a percentage of total shares in the merged company. You also enjoy a position of respect and
standing in Vita, not just due to your position as CEO, but also because you were one of the
original 2 founders of the company. You might find that this lessens as Vita becomes part of a
bigger business, and therefore any influence that you can exert over the strategic direction of the
merged company may be open to more scrutiny and challenge than you are used to.

Culture

Although Vita and Funfitt work in the same area of industry, it is probable that they are different
in cultural terms. A decision will need to be taken on what would be the best culture to adopt as a
merged entity. This will inevitably require careful thought and change management. The ideal
would be to look at the best that the separate businesses have currently and ‘cherry pick’ those
aspects, but this will inevitably mean change for all in the new company.

For example, it may be that staff such as software designers have enjoyed significant autonomy
whilst working for Vita, but the former Funfitt management believe that exercising greater central
control is needed to make the new company a success. Former Vita staff will therefore need to
adapt, which might cause friction and therefore resistance to the change proposals.

Access to markets

The merger should allow both of the current companies to access new areas of business. For
example, Funfitt has already enjoyed success with entering the growing smartwatch market
through its launch of the Funwatch (although there appear to have been quality issues as
evidenced by the product recall). This can only be to the benefit of Vita which has yet to enter the
growing smartwatch market.

Equally, Funfitt would benefit from Vita’s existing expertise in designing fitness trackers aimed at
new segments of the market, such as the Chorus aimed at those aged 8 and over.

64 KAPLAN PUBLISHING