CH12 - Acquisition Consideration

Question 1

Types of Takeover

Answer 1

Vertical – same industry different chain, Horizontal – competitor , Conglomerate

Question 2

Reasons for a Takeover

Answer 2

R Reduced Competition
E Economies of Scale
A Asset-stripping
L Lack of profitable investment opportunities/surplus cash
I Increased market share
S Shares of the target are undervalued
T Tax relief
I Improving efficiency
C Combining complementary needs
D Diversification

Question 3

How takeovers are paid for (Consideration)

Answer 3

Cash – fixed cash sum for share (small entity or large accumulation of cash from buyer)
Share exchange (share for share) – large acqisitions
Mixed offer

Question 4

Share for Share Exchange - Simple

Answer 4

MV of A = $800m
MV of B = $180m
PV of Synergies = $40m
Total = $1,020m
No. of new shares = $200m * ((3/5) * 90m) = 254m
New share price = $1,020m/254m

Company Shares MV Old wealth Gain
A 200m 804m 800m 4m
B 544m - above 216m 180m 36m

Question 5

Share for Share Exchange – Premium Required

Answer 5

The premium required by the subsidiary comes out of the synergy Pot! – Rest goes to the Parent to get MV Post-Acquisition

Premium - Current MV of Subsidiary*gain required

For Both:
Share Price
Shares
MV Today
Synergy - Total given and the premium formula gives the subsidiary value

MV Post acquisition
Calculate a value split e.g 2.2 per 1
Parent shares prior* Value split = share for share exchange required

Question 6

Cash Offer

Answer 6

Compare existing share price of subsidiary to cash offer price to get the gain

Synergy for the subsidiary: Gain* Shares in issue

Question 8

Mixed Offer

Answer 8

Add the cash per share offer and share for share offer value to get a total consideration value

Find the gain Minus value above minus share price of Sub*2

Take total value of Sub/2 and multiply by gain to get the premium