1: (a) Why do you believe that Leviathan is offering €100 million of the consideration for Arcango in the form of shares in itself?
Leviathan is offering €100 million of the consideration for Arcango in the form of shares in itself because it would not burden Leviathan at all for that part of the financing and apart from diluting the ownership of the existing shareholders of Leviathan, it would not have any negative impact on the company or shareholder. Moreover, being a successful company, Arcango would also bring profits that would compensate for the dilution in the shareholder’s ownership in the mother company. However, value wise, the new deal will not dilute the value of their shares and as a matter of fact, it could result in increase in value of the existing shareholder’s ownership.
Moreover, it would also help Leviathan maintain its leverage ratio within limits.
(B) Outline and explain the other benefits in addition to the €140 million that the Leviathan offer conveys to Des.
The other major benefit is that Des would be able to get rid of the governance issues that the shareholders are pointing out and that he feels cumbersome to implement. Moreover, Des would be able to diversify his investment in a better way as most of his value is stuck in a single company and thus is highly risky. This is because, in case this company fails, he would also lose all or major part of his investment So he would now be able to diversify his investment in a better way to protect his interests.
(C) Is the fact that €100 million of the consideration is in the form of shares in Leviathan problematic from Des’s perspective? Explain your answer.
As a matter of fact, this should not be problematic for Des at all. He needs to evaluate the market value of the shares and if they are fairly valued (I assume they are fairly valued as per efficient market hypothesis) so if Des don’t want to keep them, he can sell those shares and realize his value in shape of money.
(D) Do you expect Des and his shareholders to concur regarding the advantages/disadvantages of getting part of the consideration in shares in Leviathan?
I believe they should concur regarding the advantages and disadvantages of getting part of the consideration in shape of the shares in Leviathan, considering that the shares are fairly valued. This is because there is always an exit available by selling the shares if anyone wants only cash for his ownership in Arcango.
1: (a) Outline and explain the types of foreign exchange risk that the purchase of Arcango exposes Leviathan too. Which type of foreign exchange risk is the most serious from Leviathan’s perspective?
The types of foreign exchange risks that Leviathan would be exposed to by purchasing Arcango are as follows;
Transaction exposure: It is a foreign exchange risk when a company purchases goods that are in foreign currency. It results in rise in price due to change in the exchange rate.
Translation exposure: This is the kind of exposure when a company uses assets and liabilities that are quoted in a foreign currency other than the home currency of the company. The accounting regulation often require to translate assets and liabilities that are quoted in foreign currency into home currency. As a result, any change in foreign exchange risk would result in change in the value of foreign assets and liabilities and thus change in income of the company.
(B) What additional risks does acquiring a UK company bring to a US firm? Explain why the acquisition of a UK company may be less attractive from a US company’s perspective after the result of the Brexit referendum in June 2016? Fully explain your answer.
Before Brexit, a UK incorporated company was a local company for the whole European Union. It means conducting business in UK would not be subject to any tariffs or quotas in the whole Europe. Now after the Brexit, other European countries might put tariffs and quotas on UK companies which would increase the costs of doing business and may also means decrease in business. Moreover, due to Brexit, the UK pound may also depreciate significantly that may decrease the value of the company. Therefore, after the Brexit, a UK company becomes less attractive for acquisition purpose.
(C) Explicate two of the M&A classifications that might be used to describe the takeover of Arcango by Leviathan.
- Concentric merger. It is a type of merger and acquisition that occurs among the companies that serve the same customers in a specific industry, but they don’t offer the same products and services.
- Vertical Merger: It is the kind of merger and acquisition where two companies have similar services or product lines and are on the same stage of production.
3: (A) Outline some fundamental investment advice you might offer Desmond Francome regarding the €140 million that he may receive for his shares in Arcango.
He should invest in the companies that have ideally no correlation with regard to returns. This is because, if they have any correlation or significant co-relation, then if one company does not provide positive returns, other companies will also not provide any positive returns or in case of significant negative co-relation, the returns from a company will be canceled by the losses of other company or companies.
(B) Has investing in Facebook, Twitter and Google allowed Des to diversify his wealth away from Arcango? Explain your answer.
No, investing in Facebook, Twitter and Google does not allow Des to diversify his wealth away from Arcango. This is because all these companies have significant positive co-relation and thus if one company is a loss, it is highly likely that the returns from other companies will also be negative. Ideally, he should have invested in companies without any significant co-relation.
4: (A) Critically comment on the corporate governance architecture of Arcango as of Spring 2018 as outlined in the case. You answer should make particular, but not exclusive reference to the board of directors.
There are significant problems with the corporate governance structure of the company. One of the non-executive directors, David Entwistle is a close friend of Desmond. Whereas, the non-executive directors are expected to be truly independent. As a result, David advised Des what is in his own personal interest whereas he should be advising what is in the best interests of the company and all the shareholders. Then, another board member, Cillian Casey is a personal friend of Des and thus has familiarity issue in exercise of his powers at the board and in decision making. Moreover, she does not attend board meetings regularly and thus is unable to properly perform her duty.
So the board does not seem to be functioning properly and then considering the powers of CEO and having 40% shareholding as well, Des is able to influence the decision making unfairly. Moreover, he is running the company like he owns it 100% and thus only considers his own personal interest instead of taking care of the interests of other 60% shareholders as well. Whereas, in essence, he should be taking care of the interests of other shareholders more because they owns 60% of the company as compare to his own 40%.
(B) Detail two crucial additional pieces of information that you would require before you could make a full assessment of the standard of corporate governance of Arcango as of March 2018.
One additional piece of information is report on the corporate governance assessment of the auditors and second is the board minutes. Board minutes will help finding out how the board operations in actual.
(C) Outline the main conflicts of interest between Des and Arcango’s outside shareholders that are evident from the case.
The main conflict of interest between Des and Arcango’s other shareholders is that Des wants to sell the company to realize his own personal investment and want to diversify his investment. On the other hand, Other shareholders do not want to sale the shareholders because they may expect more value in sticking with the company and may earn more profits through the Arcango or Arango may sell at a higher price in future.
(D) Who will make the decision whether to sell or not to sell Arcango to Leviathan? Explain your answer
It is the shareholder that are required to make decision whether to sell or not Arcango to the Leviathan. However, the management also have the say in making the decision as they are to deal with the acquiring company and finalize the price and payment arrangement on behalf of the shareholders.