Satellite Solutions SARL (‘SSS’) is a French company involved in the supply of goods and services to the aerospace industry. The company produces highly technical electronic components for satellites and supplies consultancy services for specific ‘space projects’. SSS is publicly listed.
Over the last few years, SSS has grown significantly and is now a ‘household’ name in the aerospace sector. The Board of Directors has proven itself very capable in getting the company’s components to customers at the right time, right place and right quality and has been able to accumulate a large cash reserve. SSS has a very active research and development facility, always looking for the next opportunity in this and other industrial sectors.
The Board is looking to expand SSS into new areas and provide some diversification for its shareholders. One such area that the research and development team has identified, and the Board is now considering, is the design, construction and integration of automated robotics systems for use in the electronic vehicle manufacturing industry, a sector which has been expanding rapidly with strong indications that growth could be about to increase exponentially.
To date, the growth of SSS has been achieved organically but the Board have no experience in robotics. For this reason, the Board considers that the ideal way to expand would be through acquiring a business already operating in the robotics sector. Robotiques Logistiques (‘RL’) is a private company that has been identified by the Board as an ideal target to acquire as it is currently involved in supplying robotics systems for electric vehicle manufacturers.
RL is owned by a complex mixture of shareholders, comprising around 15 individual investors and the four members of its Board of Directors. The directors are all either highly skilled electronic engineers or software developers who have designed all of RL’s robotics products but have now reached the stage where expertise on marketing and selling is becoming increasingly essential.
The Boards of SSS and RL have already met to discuss the possibility of SSS purchasing RL. The Board of RL has indicated that the RL shareholders are keen to explore this because currently RL is constrained both by a lack of finance to further grow the business and a lack of marketing and selling skills. If RL is acquired, both parties have agreed that the current Board of RL would continue in place post-acquisition.
As regards agreeing a fair value for the proposed acquisition, both Boards accept that the base value of RL is around €5 million. In addition to that base value:
RL’s Board considers that most of RL’s value derives from its intangible assets (patents, designs, methodologies, intellectual capital) and is therefore seeking an acquisition price of €5 million plus an amount based on the present value to infinity of the post-taxation ‘excess earnings’ (those earnings above the average return on equity of the robotics sector currently estimated to be 12% per annum) that RL has generated in the last two years.
SSS’s Board, however, thinks that the amount SSS should pay to acquire RL should be €5 million plus an amount based on current average profits plus any synergy benefits created by the acquisition, calculated using the expected postacquisition PE.
On another matter entirely, the Board of SSS is discussing the company’s annual report and how to incorporate a greater degree of economic, social and environmental reporting. SSS’s competitors are increasingly adopting more transparent reporting in these areas and the CEO feels that it would be beneficial to follow suit. She is convinced that sustainable development is core to the future success of SSS. Some of the other directors, however, feel that pursuing more open reporting would be expensive and unnecessary.
- Discuss the different types of synergy and the sources of these synergies that might occur post-acquisition of RL by SSS. (12 marks – 750 maximum word limit)
- Calculate the maximum additional amount above the base value of €5 million payable on each of the two bases suggested by the Boards of Directors of RL and SSS. Show all workings. (6 marks)
- Critically evaluate each of the three options to pay for the acquisition that SSS has proposed and recommend which option would be most acceptable to both parties. Show all workings. (20 marks – 800 maximum word limit, excluding any calculations)
- Explain what economic, social and environmental reporting involves and how it wouldhelp demonstrate SSS’s sustainable development to its stakeholders. Support your explanation by providing two examples of a performance indicator that might be used to assess the impact of each of the three factors.
