Page 262 - AFM Integrated Workbook STUDENT S18-J19
P. 262

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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