Acquisition for ATC inc. to gain competitive advantage

The Technical Director suggested that one way to gain a competitive advantage in the precision farming sector would be to join forces with a data analytics company that could provide the expertise to develop further products to analyse trends from the meta$-$data collected and to turn this into useful information for the farmers. This would go further than the GPS $($global position system$)$ and control information provided by existing technologies. He also believed that this could be utilised in improving forestry management and would therefore be an investment that benefited both product divisions. There was some discussion about whether acquiring a company with the analytics capability would be more beneficial than entering into a joint venture, as this would give ATC more control over the product development. The Technical Director had identified a potential target company based in the UK which had a growing reputation for innovative product solutions. It was a private limited company imaginatively named XYZ Limited.

XYZ Limited is a UK based company that is recognised as being an innovative company in the industry with some impressive clients. The Directors XYZ Limited are keen to expand its market reach and the Technical Director $($of ATC Inc$)$ believes that the Board of XYZ would be willing to consider an offer for the company, as having recently increased the investment and taken on board loan capital they are finding that a further significant investment, or a company willing to back them, would be required to develop their products into world leading products. The Directors of XYZ have recently grown the company by the acquisition of two small, but specialist companies, which were financed by increasing the share capital and loans. The Chief Executive $($of ATC Inc$)$ would liaise with the Technical Director and make some tentative enquires about a possible approach to the Board of Directors at XYZ Limited.

Following the meeting the Chief Executive and the Technical Director had exploratory talks with the key Board members of XYZ Limited and they appear to be receptive to an offer.

The Board of Directors of ATC Inc in a separate meeting held later assessed how they feel the performance of XYZ Limited would change over the next five years if they owned it$.$ The Board believe that they can increase sales from the existing level reported in $2022$ by $10\%$ in each of the next five years $($i$.$e$.10\%$ increase on the sales value in each year $$ compound$),$ and that a one off reduction in R & D expenditure of $15\%$ could be achieved via the sharing of resources. The Marketing Director and the Operations Director of ATC Inc are also confident that a one off saving of $10\%$ on Sales, Administration and General Expenses $($SAG$)$ could be achieved on current levels. Following the reduction in R & D and SAG Expenses in the first year of ownership they believe that these expenses would essentially remain at the same level in years $25.$ The cost of capital is estimated to be $10\%.$

The accounts of XYZ Limited are shown below.

XYZ Limited $-$ Financial Statements

Consolidated income statement

All figure in $,000$s $20182019202020212022$

Revenue $20182019202020212022$

Product revenue $849\mathrm{.}0772\mathrm{.}0933\mathrm{.}01,122\mathrm{.}01,297\mathrm{.}0$

Service revenue $918\mathrm{.}0933\mathrm{.}01,002\mathrm{.}01,265\mathrm{.}01,366\mathrm{.}0$

Total revenue $1,767\mathrm{.}01,705\mathrm{.}01,935\mathrm{.}02,387\mathrm{.}02,663\mathrm{.}0$

Cost of products $302\mathrm{.}0269\mathrm{.}0306\mathrm{.}0381\mathrm{.}0416\mathrm{.}0$

Cost of services $511\mathrm{.}0502\mathrm{.}0542\mathrm{.}0688\mathrm{.}0758\mathrm{.}0$

Gross margin $954\mathrm{.}0934\mathrm{.}01,087\mathrm{.}01,318\mathrm{.}01,489\mathrm{.}0$

Research and development expenses $108\mathrm{.}0117\mathrm{.}0147\mathrm{.}0174\mathrm{.}0183\mathrm{.}0$

Selling, administration and general expenses $508\mathrm{.}0483\mathrm{.}0526\mathrm{.}0663\mathrm{.}0728\mathrm{.}0$

Operating profit $338\mathrm{.}0334\mathrm{.}0414\mathrm{.}0481\mathrm{.}0578\mathrm{.}0$

Interest charges $0\mathrm{.}00\mathrm{.}00\mathrm{.}00\mathrm{.}00\mathrm{.}0$

Profit before taxation $338\mathrm{.}0334\mathrm{.}0414\mathrm{.}0481\mathrm{.}0578\mathrm{.}0$

Taxation $88\mathrm{.}080\mathrm{.}0113\mathrm{.}0128\mathrm{.}0159\mathrm{.}0$

Profit for the year $250\mathrm{.}0254\mathrm{.}0301\mathrm{.}0353\mathrm{.}0419\mathrm{.}0$

Balance Sheet $20182019202020212022$

Non$-$Current assets

Property and equipment $-$ net book value $197\mathrm{.}0179\mathrm{.}0164\mathrm{.}0148\mathrm{.}0179\mathrm{.}0$

Capitalised software, net $80\mathrm{.}0102\mathrm{.}0116\mathrm{.}0140\mathrm{.}0173\mathrm{.}0$

Goodwill $110\mathrm{.}0109\mathrm{.}0136\mathrm{.}0742\mathrm{.}0932\mathrm{.}0$

Acquired intangible assets $163\mathrm{.}0186\mathrm{.}0$

Other intangible assets $28\mathrm{.}027\mathrm{.}061\mathrm{.}011\mathrm{.}062\mathrm{.}0$

Total non$-$current assets $415\mathrm{.}0417\mathrm{.}0477\mathrm{.}01,204\mathrm{.}01,532\mathrm{.}0$

Current assets

Inventories $44\mathrm{.}047\mathrm{.}065\mathrm{.}061\mathrm{.}047\mathrm{.}0$

Trade receivables $$ net $451\mathrm{.}0387\mathrm{.}0402\mathrm{.}0494\mathrm{.}0668\mathrm{.}0$

Other receivables $78\mathrm{.}057\mathrm{.}056\mathrm{.}085\mathrm{.}090\mathrm{.}0$

Short$-$term investments $40\mathrm{.}00\mathrm{.}00\mathrm{.}00\mathrm{.}00\mathrm{.}0$

Cash and cash equivalents $402\mathrm{.}0661\mathrm{.}0883\mathrm{.}0772\mathrm{.}0729\mathrm{.}0$

Total current assets $1,015\mathrm{.}01,152\mathrm{.}01,406\mathrm{.}01,412\mathrm{.}01,534\mathrm{.}0$

Current Liabilities

Trade payables $99\mathrm{.}0102\mathrm{.}0102\mathrm{.}097\mathrm{.}0141\mathrm{.}0$

Other payables $83\mathrm{.}076\mathrm{.}070\mathrm{.}090\mathrm{.}0132\mathrm{.}0$

Deferred revenue $255\mathrm{.}0256\mathrm{.}0263\mathrm{.}0339\mathrm{.}0375\mathrm{.}0$

Other current liabilities $103\mathrm{.}0109\mathrm{.}0134\mathrm{.}0169\mathrm{.}0158\mathrm{.}0$

Total current liabilities $540\mathrm{.}0543\mathrm{.}0569\mathrm{.}0695\mathrm{.}0806\mathrm{.}0$

Net current assets $475\mathrm{.}0609\mathrm{.}0837\mathrm{.}0$