Page 7 - CIMA SCS Workbook August 2018 - Day 2 Suggested Solutions

CIMA AUGUST 2018 – STRATEGIC CASE STUDY

Furthermore, Jack Kenny has expressed a desire to ensure that all of his staff continue to remain
employed. It could be argued that, by acquiring DST, the Board of FNG is sacrificing its own staff in
order to preserve another company’s, as closing the 2 FNG print factories would inevitably mean
redundancy for the staff that work there.

Finally, buying a business such as DST would be a time-consuming process for management. Not
only would significant time be required to reach a point where contracts can be signed (an
extensive due diligence process would be required to make sure there aren’t any further liabilities
etc.); but further time would be needed post-acquisition to integrate successfully the 2
businesses. This would be a big distraction for FNG’s management at a time when the Board
should be looking at ways to improve the company’s revenues and profits in the more immediate
future.

Preliminary conclusion

There would appear to be too much risk involved to make buying the entire share capital of DST
an acceptable strategy. However, an alternative approach may have very similar positive
outcomes for FNG, as discussed below.

Alternative approaches

Alternative approaches to achieving a similar outcome for FNG (acquiring the DST titles and/or
the print facility) include the following:

Jack Kenny retains liability for the debt

FNG could agree to buy the entire share capital of DST but, as part of the contract terms, Jack
Kenny agrees to be personally liable for the $15m of debt. This would then represent the best of
both worlds for FNG – it buys the attractive parts of DST but without taking on the downside.

This is unlikely to be acceptable to Jack Kenny, particularly at the current offer price of $1; he
would look to sell his shares for considerably more if he remains liable for the company’s debt.

Purchase the assets of the company

This would have a similar effect to the above but, instead of purchasing the company, FNG simply
agrees a deal for the assets. This would have the advantage of much more flexibility for FNG; it
could ‘cherry pick’ which assets it wishes to acquire.

For example, it might decide to purchase the print factory but not any of the DST newspaper
titles, if it feels that strategic advantage can result from state of the art facilities in a central
location. This would then give DST a substantial cash injection with which it can help finance
repayment of its debt.

However, DST would presumably look for a commitment from FNG to continue to print the 28
DST titles, as it would now have to outsource this core function having sold its own facility. Would
this make the factory less attractive due to capacity constraints?

FNG could also select which of the 28 titles it wishes to acquire, and negotiate a separate
purchase price for each. Any titles deemed unviable would remain with DST.

66 KAPLAN PUBLISHING