Question

Your company has EPS $3. With 1,000,000 shares​ outstanding valued at $42 each.

Woolworths has an EPS of $1 with 1,000,000 shares outstanding valued at $20 each.

You will pay for Woolworths by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a 16 % premium to buy Woolworths. Assume that on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for Woolworths. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.

a. What is the price per share of the combined corporation immediately after the merger is​ completed?

b. What is the price of your company immediately after the​ announcement?

c. What is the price of Woolworths immediately after the​ announcement?

d. What is the actual premium your company will​ pay?

Answer 1

1) Below is The working table reflecting computation of MPS, EPS and PE Ratio along with assumptions:

To elaborate in detail :-

Take-over premium is computed by multiplying premium rate into price of Woolworth (Takeover target) 16% * 20

Offer price is nothing but summation of Woolworth price before takeover + takeover premium = 20+3.2 or 23.2

Exchange price = Offer price / buyer share

PE Ration of the buyer = MPS / EPS = 42/3 or $14.

Profit after tax is computed by multiplying EPS * outstanding shares. 10,00,000 * 3 for acquirer and 10,00,000 * 1 and then summing up the total which is 30,00,000 + 10,00,000 = 40,00,000

Outstanding shares post merger = 10,00,000 + 10,00,000*0.55238 = 10,00,000+5,52,381 = 15,52,381

3) Price of Woolworth would have gone up just after the announcement of acquisition, but there is no mechanism to compute the extent to which it will go up. Therefore assuming it will go up atleast to the tune of 16% which is premium offered by acquired. That means price of Woolworth would be 23.2. (20 + 20*16%)

4) Premium paid would be (Deal price - current price of Woolwoths) * Number of shares

= (23.2 - 20 ) * 10,00,000

= 32,00,000