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Pricing issues and post-transaction issues

Example 5

ASH Co has made a bid for GIANT Co, in an attempt to take it over. The bid is
a 1 for 2 share for share exchange. Currently, ASH Co has 1 million shares in
issue, trading at $6.33. GIANT Co has 200,000 shares in issue trading at
$2.96. It is expected that $100,000 of synergy will be generated by the
takeover.

What is the expected share price in the combined company after the
takeover?

A $5.92

B $6.33

C $6.38

D $7.02

Solution

The answer is (C).

Total value of the combined company will be:

(1m × $6.33) + (200,000 × $2.96) + 100,000 = $7,022,000

The number of shares in the combined company will be:

1 million + [(1/2) × 200,000] = 1,100,000

Therefore the share price will be $7,022,000/1,100,000 = $6.38

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