Assignment: Case Study

Introduction

Following meetings with the board of directors of a British media publishing company Magazine News PLC (MNPLC), you have agreed to take on the post of chief business development officer (CBDO). You have been appointed as the board wish to embark on a series of business acquisitions by first acquiring a commercial broadcasting company within the continental EU. A potential acquisition has been identified. The proposed acquisition is a listed company. Based on the most recent financial statements, summarised financial information has been prepared along with the industry averages for all companies within the EU, and is provided in the Appendix. The Board of MNPLC also require advice and guidance on the method of funding the acquisition. MNPLC is a divisional company and the day-to-day management of the company will be devolved to a divisional management team, one of your key tasks is to ensure that the management team is fully aware of the importance of measures of performance, and to increase awareness of the measures which are likely to be used by both the investors and lenders to assess performance and how the management team can use a mission statement and the balanced scorecard to improve performance. You have been requested to prepare a report to the investors covering the following issues: how the company-published financial statements might be used to assess performance by investors, managers and lenders; the performance of the potential acquisition, in comparison to industry averages; how the companys performance can be monitored using internal management information; the contribution of a mission statement to improving organisational performance. The method of financing the acquisition.

Investors objectives

The Board intend to allow a high degree of autonomy to the management team, within a framework of agreed strategic objectives. Specific objectives have not yet been agreed upon, apart from a desire to achieve significant and profitable growth in revenue. Based on your discussions with the board and your knowledge of the industry, you have obtained the following information about the potential acquisition and the industry.

Business operations

Most commercial broadcast businesses operate across numerous communication media. The most significant sector is television broadcasting. Radio broadcasting is also an important sector in most cases. In recent years, the emergence of new technologies has provided opportunities for additional revenue-generating sectors. To some extent, these have been driven by the move from analogue to digital broadcasting. While this brings opportunities, it means that the audience for each sector has become more diverse, as more choices are available to the television viewer/radio listener. Three significant examples of this (digital recorders, on-demand programming and internet-based broadcasting) are considered below. In both television and radio broadcasting, some programmes are produced by the broadcasting company, while others are bought in from independent production companies. This means that each broadcaster can provide a portfolio of programmes in which part of the programming can be tailored to reflect the preferences of a regional audience, as well as offering programmes with broad, indeed even international appeal. In general terms, internally produced programmes cost less than bought-in programmes as, in many cases, the latter has already achieved a degree of success in another region. This success is likely to increase interest in the programme, and consequently the potential to generate advertising revenue, leading to a relatively high purchase cost. Examples of this can be seen by considering sports programmes. Regional preferences can be catered for through programmes devoted to regional competitions, or those sports with a strong following in specific regions. This can be complemented by broadcasting international competitions, such as matches from the UEFA Champions League. Both types of programmes are initially recorded in the financial records at cost and are treated as inventory prior to transmission. When a programme has been transmitted, the cost is written off in the income statement. For a programme that is produced in-house, cost is calculated as directly attributable materials and labour, plus a proportion of overheads.

Licensing

Both television and radio broadcasting is only possible under a licence granted by regulatory authorities. It is because it is generally easier for an existing licensee to retain a licence than for a new company to be awarded a licence that the investors have decided to acquire an existing company. This is a cost-effective alternative to establishing a new company, which would then apply for a licence. The activities of commercial broadcasters are therefore highly regulated and a breach of regulations is likely to result in significant fines. Serious breaches could lead to a licence being withdrawn or renewal being refused. In the financial statements, licences are treated as intangible assets. They are initially recognised at cost. Most of the licences are deemed to have an indefinite useful life and are therefore not amortised. The remainder is amortised over the useful life of the licence. Licensing terms are based on the EU Television without frontiers Directive (TWF). Under this directive, broadcasting companies must comply with certain requirements. The key requirements are: Free movement Broadcast quotas Safeguarding of public interest objectives Advertising and sponsorship.

Free movement

Throughout the European market, Member States must take steps to ensure that television programmes from all other Member States are freely available. However, this requirement may be set aside if programmes are deemed to infringe the public interest objectives.

Broadcast quotas

The directive has several requirements in this area. The first is that excluding broadcast time relating to news, sport and several other categories, majority of broadcast time is used for European-produced programmes. A second is that at least 10% of transmission time or the programming budget must be reserved for European works from independent producers.

Public interest objectives

There are numerous elements to this aspect. These include the need to protect minors and consumers, to preserve cultural diversity and to provide a right of reply.

Advertising and sponsorship

This is an area of considerable importance. While a commercial broadcaster generates revenue, there are clearly public interest issues to be considered. One of the ways in which public interest issues are reflected is that advertising of certain goods (e.g. prescription medicines) is prohibited. Further public interest protection is exercised by controls over the amount and frequency of advertising which is permitted. The sponsorship of programmes is permitted, subject to compliance with certain criteria. Sponsorship allows advertisers to be related to programmes, with a specific reference to the advertisers products before and after the broadcast of each segment of a programme.

Product placement

This is the practice of paying for a specific product to be clearly identified when it is used in a programme. Whether product placement should be permitted is a controversial issue. Although illegal in some European Member States, it is widely used in the US and in films (for example the marque of car associated with a specific character in the film). Whilst product placement is a means of generating revenue, there are significant concerns about the possible impact on programme content and editorial control and hence programme quality. The impact of new technologies has prompted discussion on whether the current position is detrimental to broadcasters.

Impact of new technologies

It is widely expected that new technologies - digital and internet broadcasting, will continue to be influential. In radio broadcasting, the combination of the internet and localised stations means that although programme content and therefore advertising can be targeted to a specific audience, the programme can be heard by a worldwide audience. In recent years, television broadcasting has been affected by viewers choosing to time-shift. It is widely expected that this trend will increase. The introduction of the video recorder, now replaced by other means of recording, and the use of TV players, has allowed viewers to watch a programme at a time of their own choice, as opposed to the time chosen by programmers. Such devices not only allow viewers to choose when they watch a programme but also to pause live TV. This means that advertising breaks can effectively be removed from the viewing experience. Consequently, although a commercial broadcast may be viewed by a very large number of people, the advertisements may not be seen by a significant number of them. Further development in this area has been the introduction of internet-based, on-demand scheduling. Although offered by a public service broadcaster, the BBC i-player is a leader in this field. This service, which is now also offered by commercial companies, allows viewers to download programmes after they have been broadcast in the traditional manner and to view them at a convenient time. These developments mean that the impact of advertising may be significantly reduced. Viewers and listeners can choose to remove advertising entirely from the programming they receive, while time-shifting means that they may receive date-specific adverts (e.g. for special offers by retailers) when the advert is no longer relevant. This is leading to a fall in fees that can be demanded by broadcasting advertisements and thus a fall in the revenue earned by broadcasters. In this context, one response within the industry is to seek a change in the status of product placement.

Staff roles

It is widely recognised that two groups of staff (production staff and presenters) play a key role in the success of a broadcaster, as they directly affect the quality of programmes. Production-staff contributes in two main ways. The first is by generating ideas both for new programmes and ways in which existing programmes can be improved. The second is in producing programmes in a format and style that will attract viewers and listeners. As the personality that viewers and listeners recognise, presenters have a clear influence on the popularity of programmes and consequently revenue. To ensure that both groups are provided with appropriate rewards, you propose to include an element of performance-related pay in the remuneration packages of these groups.

Advertising revenue

Revenue from advertising, which is subject to a period of trade credit, is recognised as income when the advertisement has been broadcast. The price which can be charged to advertisers is directly related to the anticipated viewing figures of the programme during which the advertising is transmitted. As discussed above, programme appeal and quality are important influences on viewing figures.

Required:

(a) Develop a Potential mission statement for use in the proposed acquisition

(b) Based upon the objectives and mission statement proposed in (a) Identify the critical success factors (CSF) and list KPIs key performance indicators for each CSF that should be monitored to ensure the acquisition is successful, and identify how the KPIs will be measured (18 marks)

(c) Clearly explain/justify the reasons for proposing each measure. (10 marks)

(d) Critically evaluate the use of equity, loans, or both, to finance the investment. (12 marks)