Question

QUESTION 3 (25) The directors of Standacone Limited have appointed you as a merger and acquisition specialist. They are considering the take-over of Allied Conveyors Limited and you are to advise them whether or not to proceed with the project. The following market information is supplied to you: Earnings Per Share Standacone 315 c Allied Conveyors 252 c Market price Per Share R 4.00 R 3.00 Number Of shares 3 million 1 million Additional information: • Cash payment of R5 million to Allied Conveyors Limited • Synergy of R6 million will benefit the takeover Required: 3.1 Calculate the value of the proposed take-over 3.2 Calculate the net present value of the take-over 3.3 Calculate the take-over premium 3.4 Calculate the post-take-over market price of the share 3.5 Calculate the post-take-over increase/decrease price of the share Assume the take-over was based on earnings per share 3.6 Calculate the exchange ratio based on earnings per share 3.7 Calculate the total number of shares in the take-over 3.8 Calculate the post-take-over earnings per share 3.9 Calculate the benefits, if any, to the companies.

Answer 1

3.1- The Value of the is R5 million which is the payment being made to Allied Conveyors Limited

3.2- The company will have a Synergy of R6 Million and is paying R5 million for the Takeover so the Net Present Value of the Takeover stands at

NPV = Synergy - Investment = 6-5 = R1 Million

3.3- The Takeover Premium is calculated as the Actual Payment - Market Value of the Company

Market Value of Allied = R3 * 1 million Shares = R3 Million

Actual Payment = R5 Million

So takeover Premium is R2 Million.

3.4- Current Market Value of Standcone = R4 * 3 million = R12 Million

Company Purchased for Cash at R5 Million bu the value of the Company is 3 Million

Therefore total value of the combined company after takeover is R12 + R3 = R15 Million.

And No. of Shares is at 3 Million

Therefore Share Price = 15/3 = 5

3.5- Post take over Increase in Price = 5-4 = 1

3.6- Exchange ratio based on Earnings per share = Earnings of Allied / Earning of Standcone = 252/315 = 0.8

3.7- Total No. of Shares in the Takeover = Exchange ratio * No. of Shares of Allied = 0.8*1 Million = 0.8 Million

3.8- Total Earnings before Takeover = 252*1 million + 315c*3million =  945c+252c = 1197c

Total No. of Shares = 3+0.8 = 3.8 Million

Earnings per Share post Takeover = 1197/3.8 = 315c

3.9- Both the companies are being benefited. Standcone is buying a company which will prove to be a strategic Acquisition and will give it Synergical benefits of R6million whereas Allied is getting a premium of 66% over its current market price which is already a Very positive. So its a Win Win scenario for both the companies.