Question

Using a brief numerical example, identify a numerical method for identifying the gains and costs to shareholders that can be expected in the event of a proposed takeover, when the terms are either a cash offer or share for share exchange.

Answer 1

In the case of merger and acquisition there are two things that occur. The acquisition premium that has to be paid and the synergy that is being received by acquiring the company. Let’s say there is company X and it wants to acquire Y and the share price of X is $70 where the share rice of Y is $30. Now if it wants to acquire Y then to attract the shareholders it will have to pay a higher price than the market price. Let’s say it willing to pay $5 above per share price to Y shareholder, this is known as acquisition premium.

Acquisition premium = Acquiring price – current market price of share of Y

Acquisition premium is the cost that shareholders will have to pay in terms of the cost of acquisition for Y. Here the payment to Y can be via cash or vias issuing shares of X, for every 2 shares of Y you get 1 share of X.

Now there is Synergy benefits. Synergy benefit is the benefit after the company has been acquired and because of the large operation or technology the company X is benefiting. Synergy benefits can be in terms of earnings per share or increase in net income.

Let’s say that prior to acquisition the earning per share of X was $10 per share but after acquisition the earnings are expected to be $17 per share. Here the synergy benefit is the increase in earning per share of $7 per share.