Mergers and acquisitions

Question 1

Potential synergies

Answer 1

🔸Strategic consideration

• More effectively compete with larger groups if they combine, better technical and creative talent
• Strong presence
• Skills and experience
• Share their best practice
• Combined data

🔸Revenue synergies

• Increase market share
• Expansion more feasible

🔸Cost savings

• Saving in current cost
• Reduce headcount where there is job duplication
• Greater negotiation power

Question 2

Minimum exchange ratio should Acquirer acquire 100% of Acquiree

Answer 2

🔹EPS of acquiree 
-EBIT
-less: finance costs ()
-Tax 28% ()
=Earnings
🔷Earnings/ Number of shares =EPS

🔺EPS of acquirer
-Earnings yield =% (current share px/EPS)
🔺share price * EY% = EPS

🔺Acquirer 
# of shares (total comprehensive income/EPS)
Market value = #of shares * share price
Or
Market value= Earnings * PE ratio

🔸Market value (Acquirer+Acquiree)
🔸Synergy: value post acquisition- MV(above)

🎯Minimum exchange ratio (Acquirer)
Earnings+synergy / #of shares = synergy EPS
Target EPS / synergy EPS = Min Exchange ratio

Question 3

Mergers have a low success rate

Answer 3

• Overestimate synergies
• Paying too much
• Lack of post merger integration
• Excessive financial leverage
• Loss of key customers or staff
• Clash of corporate cultures
• Providers of future finance may not support
• Ineffective due diligence
• Regulatory delays
• Incompatible of different technologies
• Poor business fit
• Unrecorded liabilities
• Control post acquisition
• Ineffective due diligence
• Management structure not appropriate
• Different salary scales
• Reputation damage
• Operating profits not sustainable

Question 4

Regulation of Mergers

Answer 4

• Special resolution to dispose greater part of assets
• Affected transaction
• Need detailed documentation
• Disposal must be at FV
• Court approval if > 15% objects
• Do solvency and liquidity test
• Independent experts to report

Question 5

Consideration between share offer or cash offer

Answer 5

• Consider Rand equivalent of share alternatives vs cash offer
• Partial share alternative is xx higher than cash offer
• Attractiveness of partial share alternative will vary depending
• Perform own valuation of AOR post acquisition of value > current share price
• Consider share price volatility
• Expected synergies post acquisition? May not be reflected in share price
• Consider difference in dividend policy and pension funds
• Consider income tax and CGT
• The impact of Co gearing post acquisition
• Cash offer represents certainty
• Can restricted shares be sold privately