Page 23 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

Conclusion

The main objective of a company is to maximise the wealth of its shareholders. An acquisition strategy is a
good way of generating an increase in wealth if some of these synergies can be achieved.

EXERCISE 2

EMAIL

To: Randal Edwards, Director of Finance
From: Senior Manager

Subject: AGM issues

Introduction
I have explained below the main issues that should be addressed when replying to the emails
from Mary Tang and Henry Wong.

Listed company status
Disadvantages of being listed
I’ll start with the disadvantages of being a listed company, and then cover the advantages below,
because I’d like to start by addressing Mary’s specific point.
The main disadvantage of being a listed company is that there will be a heightened amount of
scrutiny from a wide range of investors. Every decision made by the directors will be scrutinised
by analysts, shareholders and the financial press. This puts a lot of pressure on the directors, as
Mary found at the AGM.
Directors might sometimes feel that it is impossible to reconcile the needs of all the different
shareholders, although due to the clientele effect, once a company has been listed for a while and
has developed a familiar investment / dividend pattern, the shareholders will all tend to have
similar requirements.
Also, the cost of becoming listed and maintaining a listing is high. Listed companies should
continually assess whether the benefits of the listing (covered below) outweigh this cost.

Advantages of being listed
The main reason companies decide to become listed is to raise finance, by issuing both shares and
bonds on the market. There will come a point in the life of most big companies when the existing
shareholders can no longer afford to invest more money in terms of equity, so a listing enables
the company to raise money from a wide range of new shareholders. This also helps to spread the
risk of ownership among a large group of shareholders. Spreading the risk of ownership is
especially important when a company grows, if the original shareholders want to cash in some of
their profits while still retaining a percentage of the company.

84 KAPLAN PUBLISHING