Question

In: Finance

Company Alpha ltd has a market value of N$6 billion and an issued share capital of...

Company Alpha ltd has a market value of N$6 billion and an issued share capital of 60 million shares. Company Beta ltd, a company in the same industry as Company Alpha, has an issued share capital of 20 million shares and a market value of N$1 billion. Company Alpha wishes to take over company Beta, and believes that the combined company value will be N$8 billion. Company Beta has agreed to a takeover value of N$1, 5 billion.

Required:

Discuss the effect (s) the takeover of company Beta will have on the existing shareholders of company Alpha, if company Beta is acquired by:

a) An issue of new shares to existing shareholders;

b) An issue of shares to new shareholders;

c) Borrowing; or

d) A share exchange.

Solutions

Expert Solution

The effects of takeover of company Beta by Alpha by various options is as follows -

a) An issue of new shares to existing shareholders of Beta ltd from Alpha ltd will lead to following impact -

Particulars Alpha ltd Beta ltd
Market Value - a 6,00,00,00,000 1,00,00,00,000
No of shares - b         6,00,00,000         2,00,00,000
Combined Value after take over - c                                    8,00,00,00,000
Agreed takeover value by Beta - d                                    1,50,00,00,000
Market value per share - a/b - E 100 50
Market value per share after takeover- (c-d)/total number of shares(6+2)million - F                                                      81.25
Profit/- Loss for shareholder - (F-E)                   -18.75 31.25

B. Issue of shares to new shareholders -

By issuing shares to new share holders will further reduce the Market value of shareholders. It is not advisable to issue new shares by existing share holders point of view.

C. Borrowing -

Borrowing will have an impact on Earning per share of the share holders as by borrowing funds will increase the interest expenses of the company which will reduce the profit available for distribution to share holders, which will also increase the debt ratio of company.

D. A share exchange -

Share exchange means it is the number of shares Alpha ltd gives to shareholders of Beta ltd instead of paying in cash. This will have again have a impact on Market value per share of Alpha Ltd and Beta ltd shareholder's market value will increase. However, if majority of shareholders decides sell at lower rate, that will have impact on minority shareholders.


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