Question 2
John was the CFO of TS–Com PLC, the Thailand subsidiary of SG–Com Pte. Ltd., a large telecommunications company based in Singapore. SG–Com owned 70% of TS–Com. The other 30% was listed on the Bangkok stock exchange and publicly traded. SG–Com was also a public company listed on the Singapore stock exchange. John was also involved in investor relations and spoke to equity analysts from investment firms regularly about TS–Com’s financial performance.
John loved his job and was grateful that Ken, TS–Com’s CEO, recommended him for the role. They had joined SG–Com on the same day in 2013 and developed a good working relationship over the years. When Ken, a high–flyer in the Sales department, was promoted to head the Thailand subsidiary in 2020, he recommended John for the CFO role. John was thrilled to get an overseas posting that came with a generous compensation package and perks.
Early in 2023, Ken and John were working on the acquisition of a channel partner that bought cell phone minutes from TS–Com and resold them to the public. TS–Com planned to integrate vertically so that the company could bring the retail margins from cell phone minute sales into its income statement. This acquisition would increase TC–Com’s revenues by approximately 10%. Ken asked John to have SG–Com’s capital expenditure committee review the acquisition proposal and seek approval to account for this transaction as an ordinary capital expenditure.
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#3. TS–Com had planned to purchase assets constituting an entire operating business, and the acquisition contract specified that the transaction was to be a “business” (rather than an asset) acquisition. If the transaction were to be treated as an asset purchase, under Thai law TS–Com would not take over the acquired company’s customer contracts. Continuing the target’s customer relationships after the acquisition was critical to the success of the transaction. Furthermore, the transaction involved an earn–out condition, which he felt was impossible to reconcile with an asset purchase.
Ken was not convinced. He escalated the matter to Larry, SG–Com’s CFO, who was John’s manager. Larry explained to John that it would be better for the company to record the purchase as an ordinary capital expenditure. The telecommunications industry’s growth rate had stalled, so industry analysts were scrutinizing earnings growth and trends closely. Earnings derived from a business combination would not be valued favourably as “organic” growth. Senior management at SG–Com naturally wanted earnings to be valued as favorably as possible.
(b) Assuming you are John, examine the possible courses of action to deal with the ethical issues discussed in Question 2(a) and justify the appropriate action or actions to take.
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