MBA - Financial Management Workbook

CHAPTER 6
MERGERS AND ACQUISITIONS
QUESTION 1 [25]

The directors of Bonn (Ltd) have appointed you as a merger and acquisition specialist. They are
considering the acquisition of Boxer (Ltd). You are to advise them whether or not to proceed with the
project.

The following information is available:

Bonn (Ltd) Boxer (Ltd)

Market price per share R20.00 R16.00

Earnings per share R6.00 R4.80

No. of shares issued 4 million 1 million

Cash payment to Boxer Ltd = R24 million.

Synergy benefits of R20 million will accrue through the acquisition.
Boxer Ltd have just had their assets re-valued and the valuation has appreciated quite
significantly
Required:
Assume the acquisition is based on market values with a cash payment:

1.1 Discuss the possible tax gains from a merger and acquisition (5)
1.2 Calculate the combined value of the proposed acquisition (2)
1.3 Calculate the net present value of the proposal (2)
1.4 Calculate the acquisition premium (2)
1.5 Calculate the post-acquisition market price of the share (3)
1.6 Calculate the post-acquisition increase/decrease price of the share (2)
Assume the acquisition is based on earnings per share:

1.7 Calculate the exchange ratio based on earnings per share (3)
1.8 Calculate the total number of shares in the proposed acquisition (2)
1.9 Calculate the post-acquisition earnings per share (4)

35 MANCOSA - MBA
 MBA - Financial Management Workbook

SOLUTION
QUESTION 1 [25]

1.1 - Net operating losses the combined firm will have a lower tax bill than the two firms
considered separately.

- Unused debt capacity

- Asset write-ups- increased valuations, more depreciation, bigger tax deduction

- Reduction in capital needs (5)

1.2 Value of combined acquisition R20 x 4 = R80m + (R16 x 1m + R20m)

= R80m + R36m
= R116m (2)

1.3 Net present value of proposal R36m R24m

= R12m (2)

1.4 Acquisition premium R24m R16m

= R8m (2)

1.5 Post acquisition price per share (R116m R24m) / 4 million shares
= R92m /4m
= R23 (3)

1.6 Increase in share price R23 R20

= R3 (2)

1.7 Exchange ratio based on EPS R4.80/ R6.00

= 0.8 (2)

1.8 Total no. of shares (1m x 0.8) + 4m shares

0.8m +4m shares
= 4.8m shares (3)

MANCOSA - MBA 36