Introduction Following a number of meetings with a group of investors, you have agreed to take on the post of chief operating officer (COO) in a newly formed company. The company has been established as the investors wish to acquire a commercial broadcasting company within the EU, and 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 investors’ intention is that the acquired company will continue to be funded by a mixture of equity and debt. As the investors will not be involved in the day-to-day management of the company, one of your key tasks is to ensure that the management team is fully aware of the importance of measures of performance. In particular, you wish 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’s published financial statements might be used to assess performance by investors, managers and lenders; how the company’s performance can be monitored using internal management information; the contribution of a mission statement to improving organisational performance. Investors’ objectives The investors 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, apart from a desire to achieve significant and profitable growth in revenue. Based on your discussions with the investors 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 a number of 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 have 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 the relatively high purchase cost. Examples of both of these 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 programme 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 to the income statement. For those programmes which are 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 seen as 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 a 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 are 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 a number of 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, the 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 a number of 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. On the one hand, it is the means by which a commercial broadcaster generates revenue whilst, on the other hand, 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) i s 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 particular programmes, with a specific reference to the advertiser’s 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 a number of 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). While product placement is seen as 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, in particular 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 world-wide audience. In recent years, television broadcasting has been affected by viewers choosing to ‘time-shift’. It is widely expected that this trend will increase. Since the introduction of the video recorder, it has been possible for viewers to watch a programme at a time of their own choice, as opposed to the time chosen by programmers. This trend has been developed further with the advent of digital recorders. 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. A 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 a number of 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 for 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 contribute 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 hence revenue. To ensure that both of these 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. Appendix Summary Financial Information average Year ended 30 June Income statement summary Revenue Costs Profit before tax Taxation Profit for the year Dividends paid Retained profit for the year Analysis of revenue Radio broadcasting Television broadcasting Analysis of costs Purchase of programmes Programme production costs Sales costs Staff costs Depreciation Operating lease rentals Interest Statement of Financial Position Property plant and equipment Intangible assets (licences) Current assets Inventories Trade and other receivables Cash and c a s h e q u i v a l e n t s Total assets Equity and liabilities Ordinary share capital (€1 per share) Retained earnings Non-current liabilities Bank loans Provisions Deferred tax liability Current liabilities Trade and other payables Bank loans Taxation Total equity and liabilities Potential acquisition Industry 2016 €000 2015 €000 2016 €000 2015 €000 107,161 82,591 24,570 4,575 19,995 2,399 17,596 102,875 80,939 21,936 4,346 17,590 2,022 15,568 284,844 198,218 86,626 16,753 69,873 5,200 64,673 271,958 196,898 75,060 14,533 60,527 4,300 56,227 40,507 66,654 107,161 40,327 62,548 102,875 159,513 125,331 284,844 157,736 114,222 271,958 12,389 27,585 14,371 22,999 1,493 1,834 1,920 82,591 13,760 25,901 13,436 22,630 1,374 1,619 2,219 80,939 25,372 75,521 29,336 59,797 3,195 1,544 3,453 198,218 26,384 73,837 27,960 60,343 2,974 1,715 3,685 196,898 9,533 155,856 165,389 10,572 149,632 160,204 31,319 331,563 362,882 21,822 299,544 321,366 382 29,552 418 30,352 195,741 399 27,841 367 28,607 188,811 1,244 76,843 532 78,619 441,501 1,185 70,644 488 72,317 393,683 7,500 75,427 82,927 7,500 57,831 65,331 24,500 281,383 305,883 22,850 213,366 236,216 28,097 418 46,781 75,296 33,972 401 50,268 84,641 42,955 643 25,299 68,897 54,941 783 32,841 88,565 21,995 11,634 3,889 37,518 195,741 23,743 11,315 3,781 38,839 188,811 45,954 4,852 15,915 66,721 441,501 50,483 5,194 13,225 68,902 393,683 Average market price per share €18·52 €16·73 €21·85 €19·63
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