Case study for Chapter 20

The directors of Gropius & Garner Productions plc are about to hold one of the most
important board meetings in the companys history. A few months ago the founding shareholders,
Brendan Gropius and Amelia Garner, suggested to the board that it was time to think about going
public, by obtaining a listing on the Stock Exchange.
Brendan Gropius is the companys managing director, and Amelia Garner, who is a chartered
accountant, is the finance director. They founded the company, which produces television
commercials and documentaries, nine years ago. Since starting business, the company has produced
strong results; it has grown very rapidly and now employs almost 750 staff. The shares are currently
held as follows:
Bernard Gropius 40%
Amelia Gardner 30%
Sigmund Gropius (Bernards cousin) 15%
Karl-Heinz Muller (Amelias brother-in-law) 15%

As well as Bernard and Amelia, Sigmund and Karl-Heinz also hold directorships. There is
one further member of the board who does not hold any shares: Judy Segal who holds overall
responsibility for the production of commercials and documentaries.
Bernard and Amelia propose that 300 000 of the 700 000 shares currently in issue, would be
sold. Each director would sell shares in proportion to his or her total shareholding as shown below:
Director

Shares currently held

Shares to be sold

Shares remaining

(3/7)
Bernard (40%)

280 000

120 000

160 000

Amelia (30%)

210 000

90 000

120 000

Sigmund (15%)

105 000

45 000

60 000

Karl-Heinz (15%)

105 000

45 000

60 000

TOTAL

700 000

300 000

400 000

Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378)
Catherine Gowthorpe, 2011 published Cengage Learning EMEA

In addition to the 300 000 existing shares which would be sold, the company would issue a further
200 000. The directors have been advised by their corporate finance advisers that they could probably
raise around 10.50 per share on flotation, after taking into account all the costs of issue.
There are two principal reasons for the proposal to obtain a listing:
1. Bernard and Amelia are both paid large salaries for their work as directors of the company.
However, they are both interested in selling a substantial part of their shareholding now, while
share values in the market generally are high. The sale would allow each of them to realise a
substantial amount of cash which they could then invest elsewhere. They would both like to plan
for an early retirement in about 5 - 8 years time.
2. The company plans to move into childrens entertainment programmes because there are very
substantial profits to be made from this area of the market in programmes. This will require a
substantial investment of resources. Borrowing money to fund the expansion would be a
possibility, but both Bernard and Amelia feel that the time is right for a flotation.

Judy Segal, the sole director without a shareholding, is concerned about the proposal. She can
see, of course, that her fellow directors all stand to gain substantial sums by selling their shares, but
she is not sure that the flotation will be advantageous to the company in the longer term. She would
like the company to remain as an independent operator, and she has been alarmed by a spate of recent
takeover announcements in the business press. She fears that, once floated, the company could be
swallowed up rapidly by one of the bigger companies.
Bernard assures her that there is no particular reason why Gropius & Garner should become a
takeover target. The company is well-managed and has a good record of producing profits even in
difficult times. He can see nothing but advantages from the move.

Required: discuss the advantages and drawbacks of Stock Market flotation for the company, taking
into consideration the following questions:

Would the company be at risk of becoming a takeover target?

Are Bernard and Amelia being unreasonable in wanting to cash in their shares?
Is Bernard correct in seeing only advantages in the flotation?

Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378)
Catherine Gowthorpe, 2011 published Cengage Learning EMEA