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Task 2: solution

Marking guide

Task (a)
My questions are firstly what is the logic in us buying Deuce? I need to be able to understand the
reasons and the drawbacks a bit better.
Task (b)
Also how could we go about buying them and how would we pay for it?

Business skills Marks


Task (a)
Approach: This is a straightforward question about the pros and cons of Deuce in
relation to what you know about Dreempark. It also requires some knowledge
about the pros and cons of external growth. Ensure you relate your points to
Dreempark and leisure.

This is an example of Diversification, new product and new market (Ansoff Up to 2


matrix) marks for
It is largely outside of the core competences of Dreempark because it involves theory and
running hotels or resorts and it is therapies and not rides or dolphin shows advice
It is probably a bad idea for Dreempark to do this

Benefits of acquiring Deuce


Spreads risks Up to 3 per
o Dreempark is totally dependent on theme parks for its earnings and principle or
over 50% of these earnings come from Dreem Depth which could be valid point
adversely affected by concerns over the welfare of dolphins made
o Having wellness would reduce the importance of Dreem Depth to
Dreemparks total earnings
o Dreemparks is also affected by weather because it is outdoors, but
Deuce is not outdoors
o The business of Deuce is not likely to be as seasonal as theme parks in
Europe are
It will give reliable cash flows
o Unlike theme parks, the wellness spas do not require constant
investment in new rides and attractions
o Deuce could become a cash cow to support the investment needed to
support the theme parks, the stars in Dreemparks product portfolio
(BCG matrix)
Business is still in the leisure sector
o Dreempark is a leisure business and so is Deuce. Some skills will be
transferrable between the businesses (property management, people
management, on-line sales and so on)
o Being in the same sector will avoid upsetting the shareholders of
Dreempark
May be possible to cross sell from Dreempark
o Many of Dreemparks visitors are the parents of children who may like
to visit Deuce as a reward to themselves for later for having taken
children to Dreempark
o It may be possible to put Deuce concessions into hotels near our parks
Very quick way into the wellness industry

Adrian Sims 2016


Task 2: solution

o Buying Deuce will give Dreempark 20 resorts, staff and a brand


immediately
o This will be quicker, and may be cheaper, that trying to launch and
build a brand from the start.
May help answer investor desire for new initiatives
o The CEO is under pressure to find lines of business beyond the
traditional business established by Burl Stanton
o This is a new initiative

Drawbacks of acquiring Deuce


Will pay premium for brands and customers of Deuce
o This may make it more expensive that starting out own wellness
centres
Lack of knowledge of wellness industry
o Dreempark does not have experience of hoteling or running spas
o This means we may not be able to properly evaluate Deuce before
buying it
o It also means we may not be able to run Deuce very well
Contingent liabilities of Deuce
o Dreempark needs to assess the liabilities it takes on when it buys
Deuce
o Severing contracts with suppliers
o Staff pensions, tax, outstanding litigation etc
May pay too much
o Randolph will expect to receive the present value of the future
cashflows from Deuce.
o These are very hard to establish
o May get into a bidding war with other firms
Management of transition may be difficult and costly
o Staff morale and productivity in Deuce may fall Max 15
o There may be cultural problems in managing its staff marks (10
Increases investment in Europe which is a mature market general, 5
o Lower rate of return applied)
o Forego better opportunities elsewhere

Maximum Business marks awarded 15

Technical skills Marks


Task (b)
Approach: this asks two things: how to buy, and how to pay. They are related but
you must ensure you answer both elements. Again relate it to Dreempark and its
cash position and what you know about its share capital (which is not available
from the pre-seen).

Approach Board and agree an acquisition


The Board of Randolph plc has issued a general teddy bear hug ie it has Up to 4
indicated it wished to speak to acquirers. Therefore an negotiated acquisition marks for
may be possible identification
Senior management of Dreempark would need to arrange to meet the Board of method of
of Randolph to discuss terms. Ideally Dreempark should seek a period of offer
exclusivity (say 3 months) and there should be confidentiality clauses in place

Adrian Sims 2016


Task 2: solution

to protect both sides from reputation damage if talks fail and from the
disclosure of sensitive information
Negotiations could establish a price at which the Board of Randolph would sell
Deuce (probably having consulted its major shareholders in advance)
The benefits of this are
o Access to data on Deuce, for example the quality of its earnings, its
resorts, its liabilities and assets, and the likely issues and costs in
integrating the businesses. This helps ensure the price paid is realistic
o Greater chance of success
o Opportunity to plan integration strategy in advance
o Better retention of managerial talent in Deuce, eg to run Deuce in the
immediate post-acquisition period
The drawbacks are
o Potential delay in getting agreement Up to 6
o Directors of Deuce may use negotiations to gain jobs on Dreempark marks for
Board or other (unethical) benefits for themselves (eg facilitation fees, evaluation of
NED positions, consultancy fees in subsequent integration) offer

There are broadly two ways to buy Deuce


Cash Offer
Dreempark offers a cash sum for Deuce. Up to 4
Dreempark would need to raise the finance for this by issuing debt and/or marks for
issuing additional shares identification
Benefits of ways to
o If new shares are issues, or debt used, it leaves the shareholders of buy Deuce
Dreempark unchanged (assuming all shareholders take up rights)
o It will be more attractive to Randolph (ie not forced to hold
investment in Dreempark if it doesnt want to)
Drawbacks Up to 5
o Additional debt will strain cash flows and may depress share price of marks for
Dreempark due to increased risk evaluation of
o Rights issue may fail to get support and leave overhang of Dreempark ways to buy
shares on market (falling share price, hostile minority shareholders Deuce
buy in)
o Will dilute existing Dreempark shareholders is they dont take up right
issue

Share offer
Shares in Dreempark are exchanged for Deuce
Number of shares exchanged implied the value of Deuce
Benefits
o No increase in gearing or debt payments
o Allows Randolph and its shareholders to participate in any business
improvements if they wish (therefore may be cheaper than cash)
Drawbacks
o Changes the nature of shareholders in Dreempark (control, dividend
policy)
o Requires Dreempark to divulge its plans publically to Randolph
shareholders

Adrian Sims 2016


Task 2: solution

Alternative structures include share offer with a cash alternative, offer convertible
debt to Randolph and so on.
Maximum Technical skills awarded 15

Integration 3
Total for tasks 33
marks

Adrian Sims 2016