Page 6 - AMANGO MODEL ANSWER 2

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2. Cost synergies
We have already pointed that the cost synergies are valued at USD$1,969m, some with embedded

ethical dilemmas. As these ethical dilemmas are only contained in a proposal from VR, we have
chosen to rather deal with it as part of this evaluation rather than in section B6, typically reserved for
ethical dilemmas involved our own actions and choices.

The biggest contributor to cost synergies, at US$ 250m, is expected from transfer pricing
arrangements, presumably, by shifting profits from South Africa to India, or vice versa (we need the
tax rates in both countries to assess the direction as what we have is 22% overall group tax rates).

Such a saving will at best, run the risk of tax authorities detecting, and at worse, deemed to be
unethical. Why? Whilst minimizing taxes may be financially prudent, it may not be considered fair.
Currently, there is ongoing debate from a number of governments and other interested parties that
companies should pay taxes in the countries they operate and derive their profits, rather than where

they are based. Whilst global political consensus in this area seems way off, it is likely that the
debate will increase in the future. Companies that are seen to be operating unethically with regard to
this, may damage their reputation. Will our other 80% shareholders, given that this will be a share-
for-share exchange, want to be part of such a group?

The planned restructuring at head office is the next highest area of cost synergies (US$150m), this
issue might underpin the Group CEO’s knee-jerk reaction to the offer, which we discuss further as
an ethical dilemma in section B6.1 of this report. The next highest cost synergy (US$90m) will be

lay-offs in South Africa. PIC, our second biggest shareholder, clearly will have an interest in
protecting jobs as they are a state owned entity. In any event, we have enjoyed a reputation of over
100 years, having started from South Africa. Do we really want to be seen to have sold-off and

become part of group that creates redundancies? This will not only threaten our reputation but will
affect us in terms of revenues, profits and value in ways that are for now, hard to quantify!

3. Integration of the two entities (AMANGO & VR)
As we pointed out, a share-for-share exchange (as opposed to a cash offer) means we are going to

become part of new entity –the VR group, with its own potentially different culture and values. Let’s
nonetheless, assess their ability to acquire, integrate and realise synergies. VR has acquired
businesses in the past a number of times from us and seem to have been quite successful at

integrating the entities into their group. But those have been relatively smaller parts of our
operations; this time, they are seeking to acquire and control our whole group. Their gearing seem
higher than ours; presumably, the share offer will go a long way to reduce the group gearing but the
combined cost of capital of 15% seems much higher than ours. Being part of VR could give us a

better geographical balance -exposure to India, which is a plus; but we are almost 7 times bigger

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