Page 262 - AFM Integrated Workbook STUDENT S18-J19

Chapter 12

5.5 Evaluating a share for share exchange

Consider the likely wealth of the shareholders before and after the
exchange. A share for share exchange will only be accepted by a target
company’s shareholders if it leads to an increase in their wealth.

Steps in the calculation

1 Value the bidding company as an independent entity and hence calculate the
value of a share in that company.

2 Repeat the procedure for the target company.

3 Calculate the value of the combined company after the takeover.

Value of bidding company + Value of target company + Value of synergy

4 Calculate the number of shares after the takeover.

No. of shares originally in the bidder + No. of shares issued to target
shareholders

5 Calculate the value of a share in the combined company, and use this to assess
the change in wealth of the shareholders after the takeover.

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