Read the text below and answer the questions. Banana Computers, Inc., a quickly
ID: 344122 • Letter: R
Question
Read the text below and answer the questions. Banana Computers, Inc., a quickly growing start-up founded roughly 10 years ago by a few friends, had a gaming software division that never turned a profit and started to rack up significant losses. For instance, in the final two quarters of 2010 it lost $10 million and $18.5 million, respectively. Banana's board is considering selling the division, which it thinks has a value of at most $400 million. E-Gaming & Arts Co. ("EGA") has proffered the highest bid as of June 2011, despite that the division had been generally known to be up for bid since December 2009. EGA's bid was $300 million. As a result, Banana's board must decide whether to sell the division to EGA for that price.
The Banana board voted to sell the division to EGA for $300 million. A year and a half after the sale, the assets that were part of the division Banana sold to EGA are generating a $200 million in annualized profit for EGA and were recently valued at around $1 billion. Des Gruntled, a shareholder of Banana, on behalf of the corporation, recently sued the board of directors, claiming the board sold the division for too little money. What steps did the board need to be sure to take prior to selling the division to EGA to ensure that it will prevail in the lawsuit by Des?
Explanation / Answer
The board needs to be sure of the following steps:
1) The net worth of The Banana, should not be more than estimated $400 million.
2) There should have been no bid above the EGA's bid i.e. $300 million.
3) The Banana was in loss for a long period of time, reducing the net worth to $400 million.
4) The profit earned by EGA on the same division should be because o their own capability and not on the basis of wrong selling estimates.
5) That if not sold, the company's estimated value would have dropped further and have not improved as per the trend analysis.
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