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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Executive Summary

Recently Abacass Company Ltd. (ACL) has been approached by Taft Publications Incorporated (TPI) regarding the potential to purchase the organization. This acquisition can provide ACL with various opportunities to expand and have access to a new market, as well as multiple resources. Currently, ACL is near its maximum levels for its capacity, and by purchasing TPI, this issue would resolve as TPI has excess capacity. Although this acquisition may have various benefits for ACL, the purchase also has many negative aspects, including acquiring a significant portion of the debt. It is also noted that TPI's operations were heavily dependent on Mr. Gillis' involvement in the company, who has recently passed away. As a result, TPI's future remains uncertain as it has experienced changes since Mr. Gillis' passing that have not been to the company's benefit such as declining revenues and a high employee turnover rate. Overall, this investment may appear to be profitable; however, there are many negative aspects of this purchase that would be detrimental to ACL's operations.

    After our analysis, we recommend that ACL does not purchase TPI, but rather invest in a mobile app to address its current capacity issue. Upon further investigation, it became apparent that acquiring TPI proved to be more harmful than positive, as there are many risks associated with the purchase. However, just deciding not to purchase ACL would not resolve its current issue regarding its capacity, which is why we propose that it invest in a mobile app. This alternative would be an asset for ACL as it reduces operations involving printing as this is a paperless alternative, as well as aid in its current capacity issue. This option would also allow ACL to expand to a broader market as it would be accessible worldwide.

Introduction and Problem Identification

The purpose of this report is to assess the appropriateness of purchasing Taft Publications Incorporated (TPI) by Abacass Company Limited (ACL) and its overall fit with ACL's current operations, as well as provide assurance on the valuations prepared by Mrs. Gillis. TPI appears to be a beneficial acquisition as it has the potential to provide ample opportunity for ACL, as TPI could aid in resolving ACL's capacity issues. However, Albert & Boyer, Chartered Accountants do not recommend ACL purchase TPI. Upon our analysis, we discovered many uncertainties regarding the profitability of TPI. Instead, we suggest that ACL invest in a mobile app, which would address its capacity issues, as well as allow for innovation and future expansion into the market.

Analysis

When addressing the concerns brought to us by Mr. Norwood, we initially found TPI appeared to be a potentially profitable acquisition. By purchasing TPI, ACL has the opportunity to expand its operations and leave a more significant legacy for Mr. Norwood's children. Acquiring TPI would also allow ACL access to various new authors and contracts, which would enable ACL to diversify its product line to textbooks. Along with this, TPI's excess capacity would aid in addressing ACL's capacity issue. Therefore, purchasing TPI could prove to be a lucrative business decision; however, there are many risks associated with this acquisition that ACL needs to consider (see Appendix I).

Upon further analysis, it became apparent many weaknesses, and threats exist within the organization. Mr. Norwood has expressed his concern over taking on an abundance of unfavourable debt. TPI currently has over $4.2 million of long-term debt, and this value does not consider the debt ACL would have to take on to acquire TPI. Along with this, there is no job costing system in place and few controls, resulting in difficulty determining product profitability, which leads to questioning the validity of the financial statements. These factors would have to be carefully evaluated as this is a considerable amount of debt for ACL to absorb, and it is unknown how accurate the financial statements are.

The current operations of TPI are also an area that has some questionability regarding the profitability of purchasing the company. In previous years new book purchases were funded by the provincial government and books were subsidized 5%. However, this program has been eliminated, which may change the purchasing methods of the universities to options that cost less to its consumers. Mr. Norwood has also expressed the importance of his involvement in the companies, but TPI's operations have been noted to be more complicated than those of ACL. This may appear to be an issue because ACL and TPI are both organizations requiring a lot of monitoring and Mr. Norwood is unable to be in two places at once. Overall, TPI could be seen as a risky investment decision as there are many negative factors that ACL should consider.

As noted, Professor Gillis played a substantial role in TPI's operations, and the loss of this crucial figure could lead to detrimental results for TPI's future. Since his passing, there has been a significant decrease in revenues, as well as high employee turnover. Mr. Gillis' published work accounted for approximately one-third of TPI's revenues, which is an important portion of revenue stream that has to be replaced within the organization. Due to Mr. Gillis' important role in TPI's overall prosperity, it is questionable whether or not the organization will be able to operate without his guidance. ACL must consider the overall sustainability of TPI without Mr. Gillis' leadership.

Decision Criteria

Our decision primarily rested on the fit and applicability of TPI and ACL as this is the main decision that ACL is currently contemplating. Another major factor ACL should consider when analyzing the appropriateness of this acquisition is how it will allow for expansion and future profitability, as well as address its capacity issues. ACL should also consider the amount of debt that would have to be taken on to acquire TPI. These are the indicators we used to determine the overall appropriateness of this potential investment, as applied to purchasing, or not purchasing TPI.

Alternative One: Purchase TPI

As shown in our analysis, there appears to be a significant amount of weaknesses compared to strengths. However, there are elements of the investment that could be deemed beneficial for ACL after this acquisition. For example, the acquisition would be beneficial as it would allow access to various shared resources such as accounting software, knowledge, and some staff, which would help reduce some of the operating costs. It would also include a new client list that would emerge from combining the two companies, allowing new possibilities to expand the magazine sales into a new market and accessibility to more authors. TPI also brings new equipment, growth potential and the excess printing capacity ACL currently needs.

TPI has been noted for its success in the textbook industry; however, recently its operations have seen changes resulting in negative outcomes for the organization. One of the main problems is its continued net losses. As mentioned, since the passing of Mr. Gillis, the company has been losing money, and there has been a high volume of turnover within the company. Mr. Gillis was a key figure in TPI and a big part of its success, and these adverse effects directly correlate with his passing. Another downfall is the cut back to the textbook program offered by the government. The loss of the subsidized 5% will have a negative effect on textbook sales as they will be priced 5% higher regardless.

This alternative could allow ACL to increase earnings, expand production capacity, and to reach out to another market. These factors would help leave behind a legacy for both Mr. Norwood's children to step into and take over. However, the impact that Mr. Gillis' role in TPI's success is notable and there is no surprise net losses are increasing, and there is a decreasing level of employee satisfaction. TPI also focuses on a very narrow market, which would make a large expansion into the textbook industry difficult as the client list was largely based on Mr. Gillis' colleagues, which are relationships that may not be possible to maintain without him.

The purchase price seems fair as it is significantly less than the net assets; however, ACL must consider the implications of taking on TPI's debt. Mr. Norwood has expressed his displeasure towards taking on large amounts of debt, which would be inevitable with the purchase of TPI. As mentioned, TPI has a significant amount of long-term debt, as well as a purchasing price that would require a significant amount of capital. This may deem to be an issue for ACL as it would need more cash to meet the requirements of this debt, which could be difficult if TPI continues to operate in a loss position. Overall, the purchase of TPI could result in many opportunities for ACL; however, the negative aspects of this decision appear to be more detrimental to ACL's operations.

Alternative Two: Not purchase TPI

As previously mentioned, our analysis indicated a mainly negative perspective. As such, we have proposed an alternative where ACL does not purchase TPI, but instead continue to maintain the current operations of the organization. This alternative appears to involve the least amount of risk, but also the least amount of opportunity.

Primarily, TPI has experienced various alterations in recent operations. The death of Professor Gillis gives us great pause. It is clear that he was a vital part of the success of the organization, as discussed in the analysis and prior alternative. The company already suffers negative effects of his passing despite still being family owned, and this may get worse with ACL taking ownership. Also, ACL has no experience in textbook publishing or editing. Currently, ACL edits and produces one magazine. TPI’s operations are substantially more complex, with multiple different textbooks offered.

Though we discussed the potential benefits that may arise out of purchasing TPI in the first alternative, the opposite has the potential to be true. The two company’s cultures may not mesh well, which could lead to a displeased work-force, and also be harmful to ACL’s current success.

TPI already has an astronomical amount of debt that ACL would be taking on, and the purchase of ACL would inevitably involve some form of additional debt. This appears to be an issue, as Mr. Norwood seems to be very debt-adverse. Additionally, we believe the additional debt outweighs the benefits of purchasing TPI.

Although Mrs. Gillis’ expressed price for TPI appears to be fair, it is a subjective amount, with little evidence supporting it. Purchasing TPI would involve hiring an independent evaluator to verify the financial statement amounts, which would be an additional cost above the purchase price. Also, the aggressive marketing practices of TPI are an area of concern as textbooks can currently be returned by bookstores within two years of the purchase date. In previous years, this tactic encouraged bookstores to over-order under the “no risk, full return” policy. It appears as though TPI does not account for these returns which are highly probable due to over-ordering. TPI should have a sales returns and allowances account, which acts as a contra account to sales returns. Another concern with the purchase price involves the valuation of authors advance. It is not clear what this advance exactly entails, or how it is valued, and worry about assuring that this amount is correct. Essentially, we believe the economic risks far outweigh the economic benefits of expanding through the purchase of TPI and recommend the purchase not move forward.

Alternative Three: Investigate other methods to address capacity

The third alternative is not to purchase TPI but consider other alternatives to address ACL's growth needs. There are many risks associated with purchasing, as mentioned in our analysis and prior alternatives. Although the purchase would address the capacity issues that ACL is facing and provide new opportunities by introducing ACL to new authors and new contracts, these benefits would not outweigh the negative consequences of acquiring this company. TPI has always been very reliant on Mr. Gillis, as he played a large part in the editing and approval of manuscripts. Also, Mr. Gillis' own books account for one-third of all book sales in the most recent year. Since his passing, TPI has faced various challenges, including declining revenues, high employee turnover, and decreased levels of production. There are many risks associated with purchasing TPI, which is why ACL could inquire about other alternatives to address its issues.

An alternative which would address ACL's current capacity issues is to invest in a mobile app which would allow users to access the magazine through the use of their smartphone or other devices. This has become a prevalent trend as it is accessible anywhere at anytime. Studies have shown that consumers prefer accessing content on their mobile devices and this trend is anticipated to increase (Tomas, 2013). Instead of having to print a broad product range, ACL's customers could have access to an electronic version of the magazine. This would allow ACL to address its capacity issues and decrease its printing costs. Studies have also shown that 68% of tablet users read newspapers and magazines on their device that they would never have read in print (Tomas, 2013), which would present ACL the opportunity to attract new subscriptions, without having to worry about reaching the company's capacity. This recommendation would decrease the amounts of physical copies required, opening a room in other areas of the organization such as publishing and editing. By pursuing this option, ACL can still cater to those who prefer a physical copy of the magazine, but also direct its sales towards those would prefer a mobile-friendly version.

Recommendation and Implementation

As per our analysis, there are several opportunities that TPI would offer to ACL if the acquisition went through. However, there are much more risks that would potentially arise. After carefully examining the purchase of TPI, it is apparent that it would not be appropriate for ACL to purchase TPI, but rather invest in a mobile app to address ACL's current capacity problem. After comparing this alternative to ACL's current opportunities, it appeared to allow ACL the greatest chance for continued prosperity in the future. This recommendation aids in ensuring profitability, as well as address ACL's current capacity issues. This investment also requires less capital to acquire, as well as reduces operating costs. This alternative would need an aggressive implementation plan (see Appendix II), as it is essential that ACL develop an app quickly to maintain its position in the marketplace in regards to its current competition using this technology.

Tax Recommendations

Although we do not recommend purchasing TPI, if ACL were to do so, the optimal tax structure would be to minimize the amount that could be considered taxable income. As this is out of the scope of Albert & Boyer, Chartered Accountants' line of work, we suggest that after the decision is made to purchase or not to purchase, it would be ideal to consult a tax specialist on the tax implications of an acquisition, or of creating a mobile app. This expertise will help make the transition smoother and allow for precise tax planning.

Summary

ACL is currently a thriving organization that has endless opportunities to expand its success. Although purchasing TPI may appear to be an agreeable investment, upon further analysis, the negative consequences regarding this purchase outweigh the overall benefits. As a result, it is not recommended to purchase TPI but instead, invest in an alternative measure to address the current capacity issues. Albert & Boyer, Chartered Accountants recommend ACL develop a mobile app that will allow its users to access the magazine worldwide, as well as eliminate costs regarding printing. This would allow these resources to be allocated to other areas throughout ACL and enable ACL to reach new markets, as well as reduce its ecological footprint.

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