Dobby, Inc is a UK based food processing and packaging company. It has developed a great domestic presence in the number of Northern European countries (Sweden, Denmark and Norway) and now is considering expanding into other EU countries, especially Germany. In recent years it has experienced a period of volatility in its profits related to the cost of raw materials (fruit and vegetables).

The CFO and CEO of the company are discussing possibilities of M&A as a way to increase sales and reduce volatility of profits.

After the extensive search they identified a Bulgarian agricultural company Kaisia, Ltd that grows wide range fruit and vegetables, buys products from local farmers and also has its own line of juices and canned fruit and vegetable, that are selling in the Eastern European region and in Germany.

There are several points about the potential deal:

1. The Bulgarian company has very good raw material base.
2. It currently experiences financial difficulties due to poor economic condition in Bulgaria. Banks reluctantly provide credits to agrobusiness and at very high interest rates. The cost of debt for Kaisia is 8%.
3. If acquired by Dobby, Inc It needs additional capital investment into modern warehousing facilities to increase supply to UK and Western Europe.
4. Kaisia has relatively outdated marketing and had not changed its marketing strategy in years. Dobby has very experienced team of marketers and is a well-established brand name in UK and Northern Europe.
5. Dobby has been able to secure some euro-based credit financing from a UK investment bank, which is less expensive than any credit Kaisia can attract. The cost of debt for Dobby is 6%.
6. There are concerns related to integration due to very limited use of IT systems in Bulgarian company. CEO argues that it can be built from the scratch, but the Head of Dobbys IT department I concerned that Kaisia is lacking the culture of using IT systems and that it is a major risk that he sees in the integration process. They pal not operate the system online from UK.
7. There is a risk identified in due diligence that the major German retail network currently buying from Kaisia is interested in cheap/medium quality product. Packaging and marketing is not an issue for them. Dobby marketing specialists are concerned about the effect that repackaging and new more expensive branding will have on sales.
8. The estimated synergy from raw material cost reduction and after all expenses is assumed to be EUR 320 million if realized within one year after acquisition.

Questions

1. Define operational synergy and provide examples where the acquisition of Kaisia by Dobby can provide that synergy?
2. Explain the risk related borrowing additional resources from the investment bank by Dobby. Provide at least two solutions that you would implement.
3. Can this deal provide diversification opportunities for Dobby? Identify if any.