Page 263 - AFM Integrated Workbook STUDENT S18-J19
P. 263

Strategic aspects of acquisitions







                  Question 1





                   Doris Co is planning to make a bid for Bebo Co.

                   The offer to Bebo Co’s shareholders will be a 3 for 10 share for share
                   exchange, and if the acquisition goes ahead the directors of Doris Co expect
                   that synergies with a present value of $0.5 million will be generated.

                   Doris Co currently has 6 million shares in issue, trading at $2.60 per share,
                   and Bebo Co currently has 2 million shares, trading at $0.65 per share.

                   Required:

                   Calculate the percentage gain on a Bebo Co share under the share
                   exchange, and advise the Bebo Co shareholders whether they should
                   accept the offer.

                   Solution

                   Step by step approach:

                   1    Value the bidding company (Doris Co) as an independent entity.


                        6 million shares × $2.60 = $15.6 million

                   2    Repeat the procedure for the target company (Bebo Co).

                        2 million shares × $0.65 = $1.3 million

                   3    Calculate the value of the combined company after the takeover
                        (incorporating the synergy).

                        $15.6 million + $1.3 million + $0.5 million = $17.4 million

                   4    Calculate the number of shares after the takeover.


                        6m (Doris shares) + (3/10 × 2m) (shares issued to Bebo) = 6.6 million













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