Scenario
You have almost completed your analysis of Companies A and B and are scheduled to deliver your proposal to the board. While researching to ensure accurate and up-to-date data, you learn that two of Company B's aircraft have been grounded over the past couple of months due to technical issues, one of which could have been an FAA safety violation.
The subsequent investigations, technical repairs, and grounded flights have led to a 10% drop in their revenue over the last month. Mitigation expenses have added about $80,000 to their operating costs. Company B has also suffered negative customer feedback due to some of the ground crew's mishandling of the situation.
write an executive summary to capture the situation and share your analysis and perspective on how these safety issues might affect your acquisition recommendation.
Prompt
Write an executive summary describing the newly discovered concerns and your analysis of the situation at Company B.
Specifically, you must address the following rubric criteria:
Summarize the safety issues and their direct impact on the company over the past month.
Describe how this news affects factors other than revenue, which will then affect the company's value.
How does this affect your initial performance evaluation and analysis of the company?
Do you see any additional risks? Explain.
Will it impact your recommendation about acquisition? Why or why not?
What additional information about this situation will you need to make your final decision?
Full Answer Section
Impact on Initial Performance Evaluation and Analysis:
These safety issues necessitate a significant revision of our initial performance evaluation and analysis of Company B.
- The initial evaluation likely did not account for the high risk of such significant operational disruptions.
- The financial projections must be revised to reflect the recent revenue decline, increased operating costs, and potential future penalties.
- The risk assessment must be adjusted to incorporate the increased regulatory risk and reputational damage.
Additional Risks:
Beyond the immediate financial and reputational consequences, additional risks include:
- Litigation: Potential lawsuits from customers or affected parties.
- Supply Chain Disruptions: Delays in obtaining replacement parts or repairs could further impact operations.
- Increased Insurance Premiums: Safety violations and incidents may lead to higher insurance costs.
Impact on Acquisition Recommendation:
These findings significantly impact my acquisition recommendation. While Company B may still possess valuable assets, the increased risks and potential liabilities demand a thorough re-evaluation. At this time, I would lean against a recommendation to acquire, until further information is obtained.
Additional Information Needed:
To make a final decision, I require the following additional information:
- FAA Investigation Findings: The official report from the FAA regarding the safety violation.
- Root Cause Analysis: A detailed analysis of the technical issues and the ground crew's handling of the situation.
- Corrective Action Plan: Company B's plan to address the safety issues, improve customer service, and regain customer trust.
- Financial Projections: Revised financial projections that incorporate the impact of the recent events and potential future liabilities.
- Reputation Recovery Plan: A detailed plan on how Company B plans to repair their brand perception.
- Insurance policy review: A review of the current insurance policies, and what the potential increase in premiums might be.
Sample Answer
Executive Summary: Company B - Impact of Recent Safety Issues
To: Board of Directors From: [Your Name] Date: [Current Date] Subject: Re-evaluation of Company B Acquisition: Impact of Recent Safety Issues
Summary of Safety Issues and Direct Impact:
Recent findings indicate Company B has experienced significant operational disruptions due to technical issues grounding two aircraft over the past two months. One of these incidents involves a potential FAA safety violation. These events have resulted in a 10% revenue decline in the last month and an $80,000 increase in operating costs due to investigation and repair expenses. Furthermore, negative customer feedback indicates mishandling of the situation by ground crew.
Impact Beyond Revenue and Company Value:
These safety issues extend beyond immediate financial losses and significantly impact Company B's overall value.
- Reputational Damage: The potential FAA violation and mishandled customer service incidents severely damage Company B's reputation, particularly regarding safety and customer trust. This erosion of trust can lead to long-term customer attrition and difficulty attracting new clientele.
- Regulatory Scrutiny: The potential FAA violation increases the risk of regulatory penalties, further investigations, and potential operational restrictions. This uncertainty adds significant risk to the company's future operations.
- Employee Morale: Grounding aircraft and facing customer backlash can negatively impact employee morale, potentially leading to decreased productivity and increased turnover.
- Brand Perception: The brand perception of Company B has been damaged, and will require a large amount of work to repair.