Borders Finance and Decision Making
Borders Group Inc. was incorporated in 1994 by two brothers, Tom Borders and Louis following its separation from the parent company, Kmart Corporation. However, before incorporation, the company had been in operation since 1971, having started as a small bookstore and eventually growing tremendously over the years with various superstores’ branches being opened. The company’s core business is selling books, music, conducting special events like live music and story times featuring artists and authors. In addition, Borders Group Inc. operates coffee bars within its superstores, which have been very profitable despite the stiff competition in the market. currently, the company has superstores in the UK, Singapore, New Zealand, Australia, the USA and Puerto Rico among others making it the second-largest bookseller after Barnes and Noble (Answers.com,2007).
Although the company’s growth has been impressive, the company’s performance has been lousy since the early 2000s due to the unfavorable book industry environment that saw the company discontinue online bookselling. Despite this challenge, the company soldiered on improving profitability by concentrating on the development of superstores (Answers.com, 2007).
Due to the effects of the economic downturn and the loss-making in the last two years, the company decided to sell Paperchase gifts and stationery business to Pershing Square Capital effective 15th April 2009 at a consideration of $65 million and the process reduce the wage costs. Assume the workforce directly operating at Paperchase represent 5% of the total labor costs of the company, other operating costs exclusively dedicated to Paperchase account for 2% of total company’s costs, and the revenues generated thereof account to 1% of total revenues, the total expected revenues for the year are $3,275 million and totally expected labor costs are $490 million and total costs are expected to be $2450 million. Further, additional costs associated with the settlement of the deal are $750000.
From the above information, labor costs associated with Paperchase, other operating costs, and the additional costs are relevant because they will have a direct effect on the decision that will be made, while the revenue could have been earned from the Paperchase is opportunity cost. Head office expenses and interest expense on loans borrowed to finance the business will not change due to the sale of Paperchase, and therefore will not be relevant.
Analyzing the impact of the sale, labor costs will be 5% of $490million which equals $24.5 million, other costs will be 2% of 2450 equaling $49million and revenues foregone will be 1% of $3275 equaling $32.72.
The analysis is as shown below;
From the above analysis, the company will save $40.08 million annual costs by selling Paperchase business. In addition, a sale price of $65 will see the company gain good consideration. The savings plus the consideration price may be used to improve or expand the remaining business lines for efficiency especially during this time of economic hardship.
References
- Answers.com. (2007). Borders Group. Web.
- Thomson Reuters. (2009). Borders Group Inc (MI): Financial Statement. Web.