Takeovers, Mergers & Acquisitions
- In determining the potential targets in an acquisition, a bidder may consider the need to
expand its scope of operations. (1 mark)
- What is Horizontal Integration? b. What is Vertical Integration? c. What is Diversification?
- Consider the following premerger information about a bidding firm (Firm B) and a target
firm (Firm T). Assume that both firms have no debt outstanding. (3 marks)
Firm B Firm T
Shares outstanding 2 ,9 0 0 1 ,4 0 0
Price per share $39 $26
Firm B has estimated the value of the synergistic benefits from acquiring Firm T is $5,500.
- c. d.
- f.
If Firm T is willing to be acquired for $29 per share in cash, what is the NPV of the
merger?
What will the price per share of the merged firm be assuming the conditions in (a)?
In part (a), what is the merger premium?
Firm T is agreeable to a merger by a share exchange. If B offers three of its shares for
every five of T’s shares, what will the price per share of the merged firm be?
What is the NPV of the merger assuming the conditions in (d)?
Are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in T be
indifferent between the two offers?
- S606 of the Corporations Act provides the general prohibition on certain acquisitions of
relevant interests in voting shares. Explain three (3) of the exemptions to this general
prohibition. (1 mark)
- Consider the following premerger information about Firm A and Firm B (2 marks):
Firm A Firm B
Total earnings $ 1 ,6 0 0 $700
Shares outstanding 600 250
Price per share $50 $20
Assume that Firm A acquires Firm B via an exchange of stock at a price of $22 for each share of Firm B’s stock. Both Firm A and Firm B have no debt outstanding.
- b.
- e.
What will the earnings per share, EPS, of Firm A be after the merger?
What will Firm A’s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not
change)?
What will the price-earnings ratio of the post-merger firm be if the market assumes
the transaction does not alter value?
If there are no synergy gains, what will the share price of Firm A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount Firm A bid for Firm B? Was it too high? Too low? Explain.
- In considering the disposal of a business, a vendor may consider the potential acquirers of
that operation. What is an Initial Public Offering? What is a Trade Sale? What is Private
Equity? (1 mark)
Fundraising
- In considering the raising of equity capital a public company may adopt various different
methods. (2 marks)
- b. c. d.
- f.
What is a Placement?
What is a Share Purchase Plan?
What is a Rights Offering?
Explain the difference between a Renounceable Right and a Non Renounceable
Right?
What is Underwriting?
What is Sub Underwriting?
- Explain why there is a tendency for Initial Public Offerings to be underpriced. (1 mark)
- Firms encounter several types of costs when issuing new securities. Identify and describe
at least three types of these costs. (1 mark)
- Firm C is proposing a Rights Offering. Currently, there are 450,000 shares outstanding at
$90 each. There will be 80,000 new shares offered at $84 each. (2 marks)
- b. c. d. e.
What is the new market value of the company?
How many rights are associated with one of the new shares?
What is the ex-rights price? What is the value of a right?
Why might a company have a rights offering rather than a general cash offer?
Financial Risk Management
- Explain the concept of a “Natural Hedge” and provide an example of this scenario? ( 1
mark)
- Firms can utilize a variety of financial products to mitigate financial risks. (1 mark)
- What is a futures contract? b. What is a forward agreement? c. What is an option? d. What is a swap?
- Company X is considering the following project which is based in the United Kingdom. It
has an initial outlay of £15m. The spot exchange rate is £1.00 : $2.00 and the respective
interest rate in the United Kingdom is 0.50% while Australia is 2.00%. Assuming the
relative WACC for this project in the United Kingdom is 5.53% and in Australia is 7.10%
then answer the following questions: (2 marks):
0 1 2 3 4
(£m) (£m) (£m) (£m) (£m)
Sales – 3 7 .5 0 0 3 7 .5 0 0 3 7 .5 0 0 3 7 .5 0 0
Cost of Sales – (15.625) (15.625) (15.625) (15.625)
Gross Profit – 2 1 .8 7 5 2 1 .8 7 5 2 1 .8 7 5 2 1 .8 7 5
Operating Expenses (4.167) (5.625) (5.625) (5.625) (5.625)
Depreciation – (3.750) (3.750) (3.750) (3.750)
EBIT (4.167) 1 2 .5 0 0 1 2 .5 0 0 1 2 .5 0 0 1 2 .5 0 0
Tax @ 30% 1 .2 5 0 (3.750) (3.750) (3.750) (3.750)
Ungeared Profit (2.917) 8 .7 5 0 8 .7 5 0 8 .7 5 0 8 .7 5 0
- c. d.
Calculate the forward exchange rates for each year in the forecast using the covered
interest parity method;
Calculate the net present value of the project using the local currency approach;
Calculate the net present value of the project using the foreign currency approach; and
Assuming Company X has sufficient funds to fund this project, should the project be undertaken.
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