Case Study A&C Consultants Inc. A&C Consultants Inc. is a medium sized consulting firm. It is a corporation with 30 partners who own most of the shares. It has ten offices across Canada, with 3,000 staff and has been in business for 30 years. Senior staff also own shares and participate in an annual bonus scheme. Salaries are generally quite low but bonuses in good years can be quite high. The balance sheet is sound (see Exhibit 1). The company has always prided itself on its customer focus. Customers are number one has been the mantra from the Chairman, Mr. Smooth, for many years. Recently however, revenue has been stagnant and the younger partners are getting restless, wondering if the older partners have lost their edge and whether changes are needed to return to the glory days of large bonuses. At a recent strategic planning meeting of the major partners, the decision was made to focus on customers as number one, to explore how to increase revenue from within the existing clientele and to explore what additional services could be provided to enrich the client experience (and revenues). It was agreed that the strength of the firm was in its blue-chip client base and this high-quality reputation was worth preserving. Some discussions were also held around the idea of selling a minority share of the company at a large multiple, if such a deal was identified. A&C Consultants profit & loss and retained earnings are provided in Exhibit 2. Earlier this week, the Chair received a call from the President of the Canadian subsidiary of a U.S. owned competitor, ZiZu International, saying that they were pulling out of Canada and would consider on offer to sell to A&C Consultants Inc. ZiZu has 12 offices across Canada and just over 3,500 staff, but has often drawn on its U.S. resources where required for large engagements. The Chair called an executive meeting and pointed out that making such a purchase would double sales, catapult A&C Consulting into the number one position in major markets in Canada, and would provide a strong marketing thrust into previously untapped mid-tier markets. Based primarily on the persuasiveness of the Chair, the executive committee approved proceeding with the negotiations. The President of ZiZu cautioned Mr Smooth that it was imperative not to have the negotiations leak out as this could lead to a loss of key staff and possibly clients. Accordingly, he urged Mr Smooth not to do the normal due diligence in their offices but to review the necessary records and meet with select senior executives of ZiZu at an off-site location. This process seemed to work well and the ZiZu executives were well prepared and very likeable. All the information checked out and the way seemed clear to do a deal. Discussion Questions 1. What is your assessment of the situation? 2. What advice would you provide to the board of A&C Consultants? 3. What pitfalls should they be concerned with? Exhibit 1: A&C Consultants Balance Sheet A&C Consultants Inc Summary Balance Sheet As At December 31st 2021 2021 2020 Year ended December 31 (Canadian dollars in millions) $ $ Current Assets Cash and Short Term Investments 12 7 Accounts Receivable 175 168 187 175 Current Liabilities Accounts Payable 34 27 Short Term Loans 100 110 134 137 Working Capital 53 38 Fixed Assets Leasehold Improvements 196 178 Furniture & Equipment 100 94 Less Accumulated Depreciation & Amortization (153) (128) 143 144 Net Assets 196 181 Share Capital Common Shares 100 100 Retained Earnings 96 81 196 181 Exhibit 2: A&C Consultants Profit & Loss and Retained Earnings A&C Consultants Inc Summary Profit & Loss & Retained Earnings For The Year Ended December 31st 2021 2021 2020 Year ended December 31 (Canadian dollars in millions) $ $ Revenue 300 290 Expenses Salaries 220 207 Other 20 18 Net Profit Before Income Tax 60 65 Income Tax Provision 27 29 Net Income After Tax 33 36 Retained Earnings Beginning of Year 81 65 114 101 Dividends 18 20 Retained Earnings end of Year 96 81