Question

4. The firm Hill is planning to acquire Dale, another firm in the same industry. Relevant financial information for the two firms is shown below. Hill Dale Price per share, $ 4.50 & 1.90 Number of shares 28,000,000 & 10,500,000 Dividend payout ratio 0.65 & 0.20 Both firms are financed entirely by equity. The acquisition will result in expected cost savings for the merged (post-acquisition) firm with a total present value of $38 million.

(a) Assume for this part of the question that Hill’s shares are valued at $4.50 each. How many new shares would Hill issue to Dale's shareholders in exchange for the whole 10.5 million of Dale's shares? What is the total value and price per share of the merged firm? Should Hill pay for the acquisition on this basis? Explain briefly. UL20/0419 Page 6 of 8 Assume now that Dale's shareholders will agree to the acquisition for a premium of $4.05 million.

(b) What is the minimum number of shares Hill should offer, such that Dale's shareholders will participate in the acquisition?

(c) Assume Hill decides to acquire Dale by issuing the minimum number of shares as in part (b). In the first year the total earnings of the merged firm will be $15.87 million. Hill’s dividend payout ratio will be maintained in the merged firm. What change in dividend payment will a former Dale shareholder get in the first year of the merged firm, if they had 1000 shares in Dale before the acquisition?

(d) What does clientele theory predict about the relationship between a firm’s value and a change in its dividend policy? Does this theory have any implications for the success of the acquisition? Explain. (150 words) (Total = 25 marks)

Answer 1

a.

Calculation of no of shares to be issued to the shareholders of Dale:

Value of firm dale = no of shares X market price per share

= 10.5m X 1.9 per share

= $19.95m

Total amount to be paid to the shareholders of Dale at a premium of 4.05m along with the market value of the firm and synergy gain:

Total amount = 19.95m + 4.05m + 38m = $62m

No of shares to be issued to the shareholders of Dale = Total amount to be paid to the share holders of Dale

Market price / share of Hill = 24m ÷ 4.5/share = 5.33m shares to be issued to the shareholders of Dale

Market value of merged entity :

Total Value of Hill = total market value of HILL + Total Amount paid by Hill to dale + synergy gain

= 28m shares x 4.5/share +24m + 38m

= 126m+24m+ 38m= 188m

market price per share is = Total value of HILL

No of shares in Hill

= 188m = 5.64 per share

28m shares+5.33m shares

b.

Minimum no of shares to be issued to Dale shareholders are stand alone value of Dale i.e 19.95m

No of share = 19.95m÷ 4.5per share = 4.4333m shares

c.

Change in percentage of dividend receipt to shareholders of Dale

EPS of Hill after merger = 15.87m$÷ ( 28m+4.43333m) sh

= 0.49 per share.

Dividend per share = 0.49 per share X 0.65 = 0.3185 per share.

% of change = (0.3185-0.2)÷0.2 = 59.25%

Change in dividend = 0.3185 x 59.25% x 1000shares

= $188.71