Abakas Ltd. Case Study

Introduction:

Norwood is very much excited about the acquisition of TPI as he believes this business will increase the profitability after having the access to TPI’s new authors and new contacts. Norwood does not like to take too much debt and he would like to bring his children into the business after retirement but he still like to receive income from the business.

Mr. Grill from TPI is the owner/founder. He is diseased. His books have the highest gross margin. His wife and son are taking care of the business. They would like to sale the business. His wife, Mrs. Grill is flexible about the deal.  She does not need any immediate cash. She wants to ensure her son Ryan plays a less demanding role

Looking at the financial statement of TPI, The main threat is, TPI is highly leveraged and loosing money over the years. ACL will also be leveraged after the acquisition. Operating losses of TPI may be increasing due to Ryan’s poor management.  The opportunity for TPI is to bargain the purchase price. The success factors are TPI has huge debt/ equity ratio. TPI has excess capacity that ACL can utilize.

The other relevant factors are the government’s subsidy programme is discontinued. Marketing synergies are not evident and there is no direct experience in book publishing so need to hire experience person in book publishing factors.

Analyse the value of TPI (Qualitative and Quantitative) :

I calculated current ratio, which measures a company’s ability to pay short term debts.

Current Ratio: Current Assets/ Current Liabilities

FY 2002:  1.05 ($ 4,694.00/ $4,485.00)

1st half of FY 2003: 0.94 ($ 5,709.00/$ 6,083.00)

Looking at the current ratio from 2002 to 2003, it has been decreased as a result it is difficult for the company to pay the short-term debt.  The company has also cash problem as well and do not have the cash in the bank account.

I calculated the gross margin ratio, which expresses the relationship between gross profit and sales.

Gross Margin ratio:  (Gross Profit/ Net Sales) x 100)

1st Half:   24.51 % ($1,601.00/$6,531.00 x100).

FY 2002:   29.09 % ($4,400.00/15,127.00 x 100)

FY 2001:   35.52 % ($5,749.00/16,585.00 x 100)

Looking at the gross margin ratio, it has been decreased over the years. The profitability is the main issue for TPI here and should take in to consideration in calculation of purchase valuation.

Actual vs budgeted Gross Profit Margin:

There is a difference in the calculation in the actual vs budgeted gross profit margin. The actual gross margin is 24.51% as per above for the 1st half of FY 2013 while the budgeted gross profit margin is 38.09 % ( $2,140.00/ $ 5,540.00 x 100). We need to find out why there is a wide difference. It could be because of lot of return of books in the actual scenario.

Actual Vs Budgeted Net Loss:

There is also difference in actual net loss vs budgeted net loss. The budgeted net loss for 1st half of FY 2013 is $105.00 ($ 55.00 + $ 50.00) while the actual net loss for the same period is $622.00.