ABE Level 7 Diploma in Business Management

Assignment Cover Sheet

Student name:

GEOFFREY KIHIU NGANGA

ABE membership
number:
Unit title:

47759
1

MANAGEMENT OF FINANCIAL RESOURCES AND PERFORMANCE

Assignment title:
College name:
Word Count:

ANALYSIS OF IOMART GROUP EASYSPACE AQCUSITIONS

LONDON SCHOOL OF LAW

3409

Date:

28/02/2015

Contents
DECLARATION........................................................................................................ 3
INTRODUCTION...................................................................................................... 1
IOMART GROUP: ANALYSIS OF ITS EASYSPACE AQUSITION....................................2
Iomart acquisitions............................................................................................. 2
Financial statements impacts on organisation decision......................................3
Financial and non financial appraisal of a strategic investment.........................3
Iomart Budgets................................................................................................... 5
Tension between financial objectives, stakeholder expectations and agency
issue................................................................................................................... 6
Risk faced by Iomart group.................................................................................7
Best-in-class Benchmarking...............................................................................8
CONCLUSION......................................................................................................... 9
RECOMMENDATIONS.............................................................................................. 9
BIBLIOGRAPHY..................................................................................................... 10
APPENDIX............................................................................................................. 12
SELF EVALUATION................................................................................................ 14

DECLARATION
I Geoffrey Kihiu Nganga declare that I did not receive any help from anybody,
neither have I copied another persons work for this assignment.

Singnature

Date

23/03/2015

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INTRODUCTION
Iomart group is a technology company offering a range of information technology
services such as: cloudsure hosting solution that hosts private cloud and
managed cloud, technology management services; business mail and hosted
exchange; cloud backup and storage archiving; and network services such as
colocation.(Iomart cloud-service,2014). The company was established in 1998
(financial annual report, 2014). The company started using the International
Financial Reporting Standard in the business year of 2006-2007 to help it prepare
its account when reporting (Investor Financial Annual Report, 2007). It is has
several shareholders but the majority shareholders are; Angus Macsween owning
15.75%, Liontrust Asset management owning 13.34% and Majedie Asset
Management owning 5.96%. The companys profit before tax in 2014 was 14.6
million, a growth of 37% from the previous year of 2013 where the profit was
10.7 million. The revenue in the same year was 55.6 million a growth of 29%
from the previous year of 2013 when revenue generated was 43.1 million. Cash
flow operation was 24 million in 2014 an increase of 62% from the previous
year where it was 14.8 million. The company also proposed to pay a dividend of
1.75p per share, an increase from the previous year of 2013 when it paid a
dividend of 1.40p per share. It further stated that the number of employees in
United Kingdom has grown to three hundred. Its corporate social responsibility
helps young people to achieve their goals, which are also a core value for the
company. (Investors Financial Annual Report, 2014)

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IOMART GROUP: ANALYSIS OF ITS EASYSPACE AQUSITION

Johnson, Whittington and Scholes (2011) defined strategy as the long term
direction of an organisation. They further stated that strategic choice involves
the option for strategy in terms of both the direction in which the strategy might
move and the method by which strategy might be pursed. To expand its
business operation, the company follows a strategy of organic growth and
acquisitions of suitable technology firms that fit their business portfolio.

Iomart acquisitions
Investors Annual Financial Report, (2014) strategic report states that over the
last five years we have made eleven acquisitions in total of those we made this
year, Redstation and Back up technology are the largest to date. All are
performing as expected and have been intergrated in to iomarts operations. The
report further noted that Bank of Scotland has provided the loans to fund the
acquisition. It also stated that the core of the market strategy is to offer the main
three layers of cloud which are network, storage and computing from strong
secured infrastructures from more sophisticated control panel. According to
Investors Financial Annual Report, (2009) the company acquired Rapid switch in
May 2009 for a total consideration of 5.25 million. Investor Financial Annual
Report, (2007) stated that the company acquired controlling 51% interesting in
Ezee DLS Limited to aid the companys strategic move to date centre market.
Investors Financial Annual Report, (2011) noted that the company acquired Titan
Internet Limited for 4.2 million and paid 3.6 million during that financial year,
it also acquired Switch media Limited in 2011 for a consideration of 1.2 million
and paid 1.0 million during the acquisition. Investors Financial Annual Report,
(2012) stated that Iomart acquired EQSN for a consideration of 2.48 million and
paid 2.5 million and, it also acquired Gold Global for a consideration of 1.2 and
paid 0.73 and 0.02 paid later in the year. Investors Financial Annual Report,
(2013) states that the company acquired HostingUK, Skymarket Limited and
Melbourne Server Hosting Limited and the acquired firms are integrated to the
company it also state that the company is still looking for other firm to acquire if
they fit Iomart business criteria. This paper has highlighted most of Iomart
acquisition but, it is going to focus on the Easyspace acquisition which was

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acquired on the September of 2005 for 12,000,000 and had 140,000 clients
that it served.(Investor Financial Annual Report, 2006)

Financial statements impacts on organisation decision

The Companies Act of 2006 requires that corporate reporting include information
such as; annual reports, corporate reporting, corporate governance, directors
reviews and directors review reports, each of which which Iomart Group complies
with. However this information doesnt help in understanding the decision
making if one is to analysis the overall performance of the organisation. Dyson
(2010) noted that the financial statements do not show the rate of return on
capital used by the company, do not reveal how efficiently the company has
used its fixed assets, how much each share earns for the shareholder or how
long it will take the company to recover the capital it has invested and such
information has to be calculated from the figures in the financial statement using
financial accounting methods. To analysis how well the company is utilising its
assets, the asset turnover, which shows how much in sales the assets used in
production are generating, the calculation revealed 0.43 times in financial year
2006, 0.33 times in financial 2007, 0.57 times in the financial 2008 and 0.64
times in the financial 2009 (See appendices calculation figures 1). In other words
the company was generating .43, .33, .57, and .64 pence respectively for every
pound of the capital invested in the asset of the business and this shows it to be
underutilising its assets.
Return on capital employed in the acquisition was 14% in the financial year of
2006; it reduced to 9% in the financial year of 2007, improved in the financial
year of 2008 to 17.8% and slightly improved to 18.6% ( See appendices
calculation figures 2). This calculations seem to show that in overall return on
capital employed had been increasing except for year 2007 this is due to an
increase in the number of customers using Easyspace services. The figures
calculated seem to show that the decision to acquire Easyspace is paying off
because of its enhanced profitability.

Financial and non financial appraisal of a strategic investment

Dyson, (2010) defined payback method as an attempt to estimate the time it
would take before an investment begins to pay for itself. Using the financial
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technique like the uneven payback method to evaluate if acquiring Easyspace

was a good investment decision, the calculation seems to support that
Easyspace acquisition was a right call because money invested was recovered
within 2.6 years and the business is still growing. (See appendices calculation
figures 3).
Arnold, (2008) argued that dividend valuation model is based on the idea that
the market value of ordinary share represents the sum of the expected future
dividend flows to infinity, discounted to present value. Using the dividend
valuation model to analysis the cost of equity used the calculation revealed the
cost of equity is 28.5% (See calculation figures 4). This helps the management to
know how much they are going to retain in the business and how much to pay to
its shareholders, but it can be problematic to base the future using past
calculation because of the changes that might occur. For instance in 2008 the
company did not pay dividend to its shareholders, which the cost of equity
calcuation had not quantified (Investors Financial Annual Report, 2008).
Adler, (2000) cited in Ghahremani, Aghaie and Abedzadeh, (2012) highlighted
that financial appraisal method used in strategic decision making has the
inability to account for the non-financial benefit in a firm, they assume that the
current competitive position will not change and they focus on the short term.
This shows they dont consider other factors that can influnce strategic decision
like employees commmitment and involvement.
Easyspace acquisition shows that it is suitalble for Iomart because it fit with the
business portfolio of Iomart. The company has various technological services that
it offers like Netintelligence which offers software services and internet security
services hosting; which provide data centers and managed hosting services and
Ufindus which provide a web marketing services to businesses (Investors
Financial Annual Report, 2008). Easyspace was acquired to provide web hosting
and domain name registration services to small and medium size business
enterprises. It suited Iomart because it could be used to expand the capacity of
Iomart to host domain names for small to medium business enterprises, which
was a opportunity for the company to exploit. Investors Financial Annual Report,
(2007) stated that Easyspace business is a solid platform of revenue, cash and
profit. This helps fund other business segments such as managed hosting to
grow, making the acquisition suitable for it strategy of growth.

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Calculation using payback method seems to show that the business had
recovered the capital invested to acquire the business within 2.6 years. The
Easyspace business segment is also making profit for the organisation and also
increasing it customers. The Investor Financial Annual Report, (2005) noted that
the company successfully integrated Easyspace to its business operation hence
overcoming the risk that the acquisition might not work.
Some shareholders may not readily accept the acquisition because the company
made a decision not to pay divident to shareholders to concentrate on other
acqusition.

This could have angered these shareholders, who expected to be

paid a divident for their investment. (Investor Annual Financial Report, 2009).
Johnson, Whittington and Scholes, (2011) noted there is an alternative way of
appraising a investment strategic decision with use of the BCG matrix. The
matrix uses market share and market growth criteria to determine the
attractiveness and balance of a business portfolio. The BCG matrix could be used
to find out if Easyspace acquisition would fit the Iomart business portfolio and
also offer positive synergies for Iomart. After carrying out a strategic anaysis on
the circumstance of Iomart, Easyspace is considered as a strategic option and
the matrix can help the managers to know:

Would Easyspace be a star; will it grow fast by increseasing its

customers?, will it consume alot of cash?, or will it eventually become a
cash cow?

Question mark; Is the acquisition a high risk either becoming a dog or

star?, is it growing or not.

Cash Cow; will the acquisition be generating more revenue/cash than it

consume, will it help other business in the portfolio to grow like the
hosting segment of the company.

Dog; is the growth of Easyspace low?

Will the acquisition promote Iomart dominant business in the technology

industry or not?
When making the strategic decision the management must have considered
micro and macro factors that affect the business. In Iomart case their was
opportunities from the business environment especially in small to medium size
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business enterprises which didnt have the necessary skills in house to build and
maintain their own website and e-commerce product, an opportunity to sell them
such services was realised by the director. The internet which changed the way
business is conducted opened up the globe as people from different region and
continet conducted business electronically opened up new opportunties for
iomart to tap on. (Iomart Prospectus, 2000).

Iomart Budgets
According to Dyson, (2010) budgets have important features: policies that meet
the objective of the company, data informing about monetary terms, documents
that are written down and the future period in time. Budgets encourage
managers to check their performance and maximise it to the highest level and
they are used for control objectives. He further stated that comparison are made
to check if the objectives are been met, this is known as budgetary control and
the budgetary control process involves manager responsibility been properly laid
out, the action plan to be followed, managers obedience to the approved budget,
monitoring the performance and comparing it with the budgeted expectation, a
correction of a high deviation from the budget, approval from senior managers
before the budgets are implemented, investigation of unaccounted for deviation.
Investors Financial Annual Report, (2014) reported that board controls it finances
by reviewing and approving annual financial operational achievement and
objectives. The board also compares results achieved and what was planned on a
monthly basis. High level of variances from the plans set are discussed at board
meeting and remedies are set in motion to rectify the deviations also any
expenditure in excess of the predefined levels requires approval from the
executive. Dyson, (2010) argued budgets have behavioural consequences that
will make the budgetary control process work, such as involving managers when
making the budget especially in the areas that concern their responsibility, the
autonomy of managers to make the budget when following guidelines from the
organisation rather than imposing it which demotivate the managers, training
and educating managers on the importance of the budget and what is expected
of them to ensure that they are committed and when variance happens,
investigating why it occurred rather than punishing the managers unless it was
intentional.

Thought Leadership, (2004) argued that adaptive management

should be introduced to replace budgeting because it enables the organisation to

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respond to customer needs and changes from the environments which are
competitive to the organisation. It further stated that adaptive management has
the following principles; setting goals that improve the organisation performance
not fixed annual target, the reward should be based on performance rather than
meeting fixed annual budgets, planning to be made regular and involves all the
parties with responsibilities rather than making it an annual event, the control of
resource to be based on performance and performance flow indicators rather
than deviation from the budgets, avail resources where needed rather than
yearly budget allocation and a co ordination of the organisation synergies rather
than annual planning. They also noted that adaptive management has leadership
principles to open communication for the whole organisation rather than
restricting it to a few chosen people, give the employees autonomy and
capabilities rather than making them follow and obey plans, the focus should be
customers not internal target of the organisation, creation of a workforce
responsible and accountable for results not hierarchies in the organisation and
performance based on the market place result not meeting internal targets.
Investors Financial Annual Report, (2014) states that the company plans to focus
its products on customers needs and it will continue to offer what the customer
needs even if the needs continue to grow and change. This shows it is making
acquisition that will help it deliver what the customers want and is focused on
the market needs.

Tension between financial objectives, stakeholder expectations

and agency issue
Andrew and Matten,(2010) argued tension exist between shareholders and
managers because of conflict of interest, where shareholders want a higher
share price, low salaries for the manager and profit, the managers wants high
salaries and may have other motive like seeking power and prestige at the
expense of the share holder. Tension also exits because the shareholder has little
knowledge and doesnt know the goals of the manager hence making them not
to trust managers. They also defined a stake holder is an individual or a group
which is either: harmed by, or benefits from, the corporation; or whose right can
be violated, or have to be respected, by the corporation. The Investors Financial
Annual Report, (2014) states that the company has made commitments toward
its corporate social responsibilities such as using the host your kit campaign as

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a means for the company to support 50 football and basketball youth teams
across Britain by giving away sport kits and equipment. It further stated that the
company paid its director Angus Macsween a salary of 267,000, a bonus of
262,000, benefit of 3,129 and pension contribution of 26,700. The total
remuneration package is 558,829 in the year 2014 which is an increased from
514,603 in year 2013. This can also cause tensions with the shareholders, who
might think he earns too much and the remuneration package is still increasing.
Investors Financial Annual Report, (2013) stated that the basic earnings per
share was 6.91 pence which was an increase of 11% from the previous year. This
could result to tension because the shareholders are earning a lot less where the
director salary is huge.

Risk faced by Iomart group

According to Investors Financial Annual Report, (2013) the company has risk
associated with its business operation. The report noted that the Easyspace
acquisition risk involved were; acquisition performance risk where the Easyspace
may not perform as expected which can have a negative effect on cash flow and
profit, hence the company mitigate this by having a integration plan where all
potential synergies are identified, Easyspace integration risk which could result in
the loss of customer and staff of the bought business is mitigated by having a
integration and migration plan which is intended to enhance a smooth process of
integration.

There is also a risk of not identifying the best target to acquire

(opportunity cost) and the group mitigats this by having internal and external
relationship to maintain an active channel for potential targets. (Investors
Financial Annual Report, 2006). This shows that a feasibility study might have
been done to check if the strategic decision to acquire Easyspace was too risky
for the companys established portfolio. The acquisition shows that the risk paid
off because the Easypace successfully integrated to Iomart business operation
and it is also a profitable venture.

Best-in-class Benchmarking
Vaziri (1992) cited in Fong, Cheng and Ho (1998) defined benchmarking as a
continous comparison process of a companys performance on critical customer
requirement against the best firms in the industry, recognised for their superior

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performance in certain functions so as to determine what is to be improved. It

aims to meet or exceed the bench marked standard by adopting appropriate
superior practices. Benchmarking potentials when marking strategic decision
include: setting customers requirement like objective evaluation and market
reality; creating clear measures of productivity by solving productivity problems;
understanding output and basing productivity on industry best practices; making
a organisation competitive by increasing com andmitment; understanding
competition and coming up with new ideas of practices and technology. Learning
industry best practices which seek high performance and being innovative. They
also noted that benchmarking is done on: processing activities of an
organisation; funtional activities which applies benchmarking process by
comparing particular business funtion at two or more organisations, and
performance activities, this is concerned with outcome characterlistics that can
be quantified in terms of realibility, speed, price just to name a few. The Hosting
News, (2009) the company was award for best managed hosting provider in the
industry. They further stated that the company holds unique position within the
market place by owning its own data centres and network infrasture which
Easyspace is part of. This shows that in the technology industry of web hosting
and other technology services Iomart has become best in the industry and others
firms can learn from it.

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CONCLUSION
When using the financial appraisal to evaluate the strategic decision to acquire
Easyspace the calculation seem to show that it was it was a good decision to buy
Easyspace because the capital invested to acuire it was paid in less than three
years, the revenue has been increasing since 2005 to 2009 and it is used to fund
the companys growth and expansion. This shows that the companys directors
are business savy strategist which is strength to the company because they can
make strategic decision which are very beneficial and profitable to the whole
organisation. They also considered the risk before the acquisition to ensure that
performance is maintain after the acquisition

and

integration to the overall

business is succesful to avoid any losses. Tension is reduced by paying the

shareholders divident but,no divident was paid in 2008 instead the money was
invested to expand it business, overall shareholder would still benefit as the
business expand and profit increase they are likely to have a receive a higher
divident. (Investor Annual Financial Report 2009). The Easyspace acquisition was
a complete success as it has enabled the company serve the small to medium
size business enterprises which has a lot of potencial because it increase the
company revenue and also fit with it core competence of hosting in technology.
kpmg United Kingdom, (2014) stated that improving economic condition and
rising business confindence has improved the Uk tech sector to fastest growth.
This shows that the technology industry is still growing and Iomart should be in
the fore front to expand it business operation so as to tap any opportunity that
the industry may provide the company.

RECOMMENDATIONS
Iomart could try and expand it business to other neigbouring European countries
because it has the competence to do and also target small to medium business
enterprises which seem to be niche market.

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BIBLIOGRAPHY
Iomart Group (2014) Investor Financial Annual Report 2005. Available from:
http://www.iomart.com. [Accessed on: 12th December 2014]
Iomart Group (2014) Investor Financial Annual Report 2007. Available from:http://
www.iomart.com. [Accessed on: 12th December 2014].
Iomart Group (2014) Investors Financial Annual Report 2008. Available from:
http://www.iomart.com [Accessed on: 15th Dcember 2014]
Iomart Group (2014) Investors Financial Annual Report 2013.Available
from:http:// www.iomart.com. [Accessed on:12th December 2014].
Andrew, C. Dirk, M. (2010). Business ethics. Third Edition. Oxford: Oxford
University Press.
Group (2014) Cloud-services 2014.
[Accessed on: 12th December 2014].

Available

from:http://www.iomart.com.

Dyson, J. R. (2010). Accounting for non-accounting students. Eighth Edition.

London: Prentice Hall.
Iomart
Group
(2014)
Financial
Annual
Report.
(2000).
from:http//www.iomart.com. [Accessed on 19th December 2014]

Availble

Iomart Group (2014) Investors Financial Annual Report 2009.

from:http://www.iomart.com. [Accessed on:19th December 2014].

Availble

Iomart Group (2014) Investors Financial Annual Report 2010.

from:http://www.iomart.com. [Accessed on: 20th December 2014].

Availble

Iomart Group (2014) Investors Financial Annual Report 2011.

from:http://www.iomart.com. [Accessed on: 20th December 2014].

Available

Iomart Group (2014) Investors Financial Annual Report 2012.

from:http://www.iomart.com. [Accessed on: 20th December 2014].

Available

Iomart Group (2014) Investors Financial Annual Report 2014.

from:http://www.iomart.com. [Accessed on: 20th December 2014].

Availble

Iomart Group (2014) Investors major shareholders 2014. Available from:

http://www.iomart.com. [Accessed on: 20th December 2014].
Johnson, G.Whittington, R. Scholes, K. (2011). Exploring Strategy. Ninth Edition.
London: Prentice Hall.
Cima
Global
(2014)
Thought
Leadership
2004.
Available
http://www.cimaglobal.com. [Accessed on:20th December 2014].

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KPMG United Kingdom.(2014). Uk tech sector record greatest growth for almost a
decade.
Availabe
from:http://www.kpmg.com/uk/en/issueandinsight/articlespublication/newsreleas
e/pages/uk-tech-sector-record-greatest-growth-for-almost-a-decade. [ Accessed
27th January 2015].
Arnold, G. (2008). Corporate Financial Management. Fourth Edition. Harlow:
Prentice Hall.
Ghahremani, M. Aghaie, A. Abedzadah, M. (2012). Capital Budgeting Technique
Selection through Four Decades; With a greate Focus on Real Options.
International Journal of Business Management Vol. 7, No 17 [Online]. Available
from: http://dx.doi.org/10.5539/ijbm.v7n17p98. [Accessed on: 27th January
2015].
Fong, S. Cheng, E. Ho, D. (1998) Benchmaking: a general reading for
management practitioners, Management Decision, Vol.36 Iss 6 pp. 407-418
[Online]. Available from: http://www.emeraldinsight.com. [Accessed on: 25th
January 2015].

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APPENDIX
Calculation figures 1
ASSET TURNOVER = SALE NET ASSET.
YEAR
S
2006
2007
2008
2009

6,417,000/14,823000=
0.43
5779,000/17,351,000=
0.33
6,320,000/11,029,000=0.
57
7,224,000/11,317,000=0.
64

Calculation figures 2
RETURN ON CAPITAL EMPLOYED
ROCE= Profit Margin Asset Turnover
Profit Margin
YEAR
S
2006
2007
2008
2009

2,087,000
= 32.5%
1,559,000
= 27%
1,978,000
= 31.3%
2,105,000
= 29.1%

6,417,000 100
5,779,000 100
6,320,000 100
7224,000 100

ROCE=
YEAR
S.
2006
2007
2008

32.5% 0.43 =
14%
27% 0.33 =
8.9%
31.3% 0.57 =
17.8%
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29.1% 0.64 =
18.6%

Calcuation Figures 3
PAYBACK USING UNEVEN CASHFLOWS
NO OF YEARS

FINANCIAL YEAR
0
2005
2006
2007

1
2
3

CASH FLOW

CUMULATIVE
CASH FLOW
(12,000,000)
(11,303,000)
(4,886,000)
893,000

(12,000,000)
697,000
6,417,000
5,779,000

Payback Period = 2+ (893,000 5,779,000) = 2 + 0.1545250043 = 2.6 (to one

decimal place)
Payback period is 2.6 years.

Calculation figures 4
COST OF EQUITY FOMULAR Ke = D1 Po + g
Ke = 5.2 0.54 + 18.9 = 9.6 + 18.9
Cost of Equity is 28.5%.

Diagram 1
THE BCG MATRIX DIAGRAM

High

Market Share

Low

Stars

Question
Marks

Market
Growth
Cash

Dogs

Cows

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SELF EVALUATION
When carrying out the assignment I have learnt how to use financial calculation
to analyse how a company is performing financial and this could help me make
investment decision. The assignment has made me realise how risk is managed
in organisation. Using Iomart group for my assignment has made understand
how technology help organisations to compete with each other.

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