Question

Case study

This case study is about Zama Brooks Ltd, a company that has been known to have bad results for the past three years. Our company has been trying to carry out an analysis to undermine whether acquisition of controlling shares in Zama Brooks Ltd will yield fruits. You are the financial director in the company interested in obtaining controlling shares in Zama Brooks Ltd and management at the company are so eager to produce good results. Management has been labeled for producing bad results for the past two (2) years by shareholders at the annual general meetings and general meetings. Managers may be under pressure to ensure that the investment yield good results. A board meeting was held to discuss the acquisition of controlling shares in Zama Brooks Ltd for the reason that it might boost income levels of the company. Despite the Earnings per share (EPS) of that entity being diluted the board went ahead with the decision to acquire controlling shares in that company. On the other hand there is another firm from Rwanda expressing interest in obtaining controlling shares in Zama Brooks Ltd even though they are at a disadvantage because the steps taken to acquire controlling shares share in Zama Brooks Ltd have reached an advanced stage.

Required

1. Critically analyze the reason why the board went on with decision to acquire controlling shares in the entity despite its Earnings Per Share (EPS) Being diluted 10 Marks

2. Identify and explain two key forms of consideration that a potential takeover company may use to acquire Zama Brooks ltd and comment on their relative advantages to Zama Brooks Ltd. 10 Marks

3. Describe techniques that Zama Brooks may use to contest a bid from a prospective potential takeover company. 10 Marks

4. Make general commentaries on capital rationing, clearly differentiating soft rationing and hard rationing, giving examples where necessary 10 Marks

5. Discuss strategic ways an organization can use to address the unfavorable contribution to the value chain of a product that originates from the internal operational side of a business firm.

Answer 1

1. Critically analyze the reason why the board went on with decision to acquire controlling shares in the entity despite its Earnings Per Share (EPS) Being diluted.

Ans) When additional shares of stock are issued by a company it could reduce the value of existing investor's share and their proportional ownership of the company. Shares can be diluted through a conversion by holders of optionable securities, secondary offerings to raise additional capital, or offering new shares in exchange for acquisitions or services.

The reason why the board went on with decision to acquire controlling shares in the entity despite its Earnings Per Share (EPS) being diluted is because through acquiring the controlling share of Zama Brooks ltd. the purchasing entity can control more voting rights than the rest of investors.

For example : A company issues 10 shares to 10 shareholders equally , each shareholder gets 10% voting rights. If the company issues 10 more additional shares and a new investor takes all of the 10 additional share , The new investor ends with 50% voting sights and control and the rest would be having only 5%.

2. Identify and explain two key forms of consideration that a potential takeover company may use to acquire Zama Brooks ltd and comment on their relative advantages to Zama Brooks Ltd.

Ans) The two key forms of consideration that a potential takeover company may use would be cash and share of the takeover company. Zama Brooks Ltd. has had bad results for the past 3 years, therefore, liquidity wise Zama Brooks Ltd. could be struggling. An inflow of cash from potential takeover company could help Zama Brooks Ltd. .

Also having shares of the potential takeover company could be an excellent investment for Zama Brooks Ltd.