Question Tag: Synergy

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 30 Marks

FM – May 2019 – L3 – Q1 – Mergers and Acquisitions

Evaluate the synergy expected from a proposed merger between Pako Plc. and RT Plc. using free cash flow analysis, and discuss limitations and alternatives.

Pako Plc. will soon announce a take-over bid for Ronke Tina (RT) Plc., a company in the same industry. The initial bid will be an all-share bid of four Pako shares for every five RT Plc. shares. The most recent annual data relating to the two companies are shown below:

The take-over is expected to result in cost saving in advertising and distribution, reducing the operating costs (including depreciation) of Pako from 76% of sales to 70% of sales. The growth rate of the combined company is expected to be 6% per year for four years and 5% per year thereafter. RT’s debt obligations will be taken over by Pako. The corporate tax rate is expected to remain at 30%.

Sales and costs relevant to the decision may be assumed to be in cash terms.

Required:

a. Estimate how much synergy is expected to be created from the take-over, using free cash flow to the firm analysis for each individual company and the potential combined company. State clearly any assumptions that you make.
Note: The weighted average cost of capital of the combined company is assumed to be 9%. (20 Marks)

b. Discuss any five limitations of the above estimates. (5 Marks)

c. Explain, generally, three advantages and two disadvantages of expansion through merger and acquisition rather than through organic growth. (5 Marks)
(Total: 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2019 – L3 – Q1 – Mergers and Acquisitions"

  • 20 Marks

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”

Summarized financial data for the companies (N Million):

PJP YP
Sales 480.0 353.0
Profit before tax 63.0 41.0
Tax (18.9) (12.3)
Profit after tax 44.1 28.7
Dividends 20.0 11.0
Non-current assets (net) 284.0 265.0
Current assets 226.4 173.0
Total assets 510.4 438.0

Equity and Liabilities:

PJP YP
Ordinary shares (10 kobo par value) 40.0 30.0
Reserves 211.2 192.0
Medium and long-term borrowing 86.0 114.0
Current liabilities 173.2 102.0
Total 510.4 438.0

Notes:

  1. After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
  2. Initial redundancy costs will be ₦10 million before tax.
  3. PJP’s cost of capital is 12%.
  4. Current share prices: PJP = N29, YP = N18.
  5. The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions"

  • 15 Marks

FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions"

  • 30 Marks

FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

You are employed by Bolade Plc (BP), a very large printing firm with retail outlets across Nigeria. Its board is considering making an offer to buy 100% of the shares of Kenny Ltd (KL), a competitor of Bolade in Aba. KL’s financial year-end is 28 February, and its most recent financial statements are summarised below:

KL Income Statement for the Year Ended 28 February 2023

Item ₦m
Revenue 17.3
Profit before interest and tax 5.9
Interest (0.3)
Profit before taxation 5.6
Tax at 21% (1.2)
Profit after taxation 4.4
Dividends declared 1.1

KL Statement of Financial Position at 28 February 2023

Item ₦m
Non-current assets:
Freehold land and buildings (original cost ₦4.1m) 3.5
Machinery (original cost ₦8.8m) 5.3
Total Non-current assets 8.8
Current assets:
Inventories 3.0
Receivables 0.5
Cash and bank 2.8
Total Current assets 6.3
Current liabilities:
Trade payables 3.5
Dividends 1.1
Taxation 1.2
Total Current liabilities (5.8)
Net Current assets 0.5
Net assets 9.3
Non-current liabilities:
10% bonds (redeemable 2031) (3.0)
Net assets after non-current liabilities 6.3
Equity:
Ordinary shares of ₦1 each 2.1
Retained earnings 4.2
Total equity 6.3

Additional Information:

KL’s management had some of the company’s assets independently revalued in January 2023. Those values are shown below:

Asset ₦m
Freehold land and building 8.3
Machinery 4.1
Inventories 3.1

The average price/earnings ratio for listed businesses in the printing industry is 9, and the average dividend yield is 6% p.a.
The cost of equity of businesses in the printing industry, taking account of the industry average level of capital gearing, is 14% p.a.

KL’s finance department has estimated that the company’s pre-tax net cash inflows (after interest) for the next four trading years ending 28 February, before taking account of capital allowances, will be:

Year to ₦m
2024 4.6
2025 4.3
2026 5.2
2027 5.7

KL’s existing equipment has a tax written-down value of ₦3.6 million at 28 February 2023. The equipment attracts 18% (reducing balance) tax allowances in every year of ownership by the company, except the final year.

You should assume that KL will not be purchasing or disposing of any machinery in the years 2024-2027 and that it would dispose of the existing equipment on 28 February 2027 at its tax written-down value.

Bolade’s board estimates that in four years’ time, i.e., 28 February 2027, it could, if necessary, dispose of KL for an amount equal to four times its after-tax cash flow (ignoring the effects of capital allowances and the disposal value of the equipment) for the year to 28 February 2027.

Assume that the company income tax rate is 21% p.a.

Required:

Using the information provided, prepare a report for Bolade’s board by:

a. Calculating the value of one share in KL based on each of the following methods:

  • i. Net asset basis (historic cost)
  • ii. Net asset basis (revalued)
  • iii. Price/earnings ratio
  • iv. Dividend yield
  • v. Present value of future cash flows
    (16 Marks)

b. Explain the advantages and disadvantages of using each of the five valuation methods in (a).
(8 Marks)

c. What are the possible benefits from the merger between Bolade Plc (BP) and Kenny Limited (KL).
(6 Marks)

(Total: 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques"

  • 30 Marks

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

The following case relates to a business expansion decision for Abayomi Plc (AP):

Abayomi Plc (AP) is a major electrical company in Nigeria. The directors have recently identified Togo as a priority location for business expansion. Togo uses currency T$. Assume today is 30 August 2021.

Company K3, located in Togo, has been identified as a potential acquisition target. AP already manages two business units in Togo, named K1 and K2, and these have shown strong performance under AP’s ownership.

K3 is particularly attractive to AP because it has its own warehouse, distribution, and logistics network, all of which could be used by K1 and K2, if the acquisition goes ahead. Currently, K1 and K2 send goods to customers from AP warehouses located in Ghana. This involves considerable cost and delay in delivery.

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings 375
Share capital (T$1 ordinary shares) 90
Total liabilities 465
Net assets 180

Additional Data:

AP aims to maintain the same capital structure as AP. That is, gearing (debt/debt+equity) would be 25% based on market values. AP would guarantee K3’s new debt, which can be assumed to have the same risk profile as AP’s debt.

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

  • P/E ratio of 12.
  • Equity beta of 1.7 and debt beta of 0.4.
  • Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

  • P/E ratio of 14.
  • Equity beta of 1.5 and debt beta of 0.3.
  • Gearing (debt/debt+equity) based on market values of 25%.
  • AP pays 6.2% interest on its long-term borrowings.
  • Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

a. Advise on:
i. The types of synergistic benefit that might arise from the acquisition of K3. (8 Marks)
ii. Possible reasons why both one-off and ongoing synergistic benefits might not be achieved to the extent expected. (4 Marks)

b. Calculate:
i. A Weighted Average Cost of Capital (WACC) for use in valuing K3 based on the proxy company’s business and country risk and AP’s capital structure. (6 Marks)
ii. A range of values for the equity of K3 in T$ as at 1 January 2022 using the following methods:

  • Asset basis. (2 Marks)
  • P/E (including bootstrapping). (5 Marks)
  • DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions"

  • 14 Marks

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, the production efficiency of the
combined entity would increase and save the combined business GH¢600,000 in operating
costs each year to perpetuity.
Though Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers"

  • 5 Marks

AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers

Evaluate whether Ape should proceed with the merger by assessing the financial impact and synergy benefits.

Ape has 2,500 shares outstanding at GH¢10 per share. Bee has 1,250 shares outstanding at GH¢5 per share. Ape estimates that the value of synergistic benefit from acquiring Bee is GH¢500. Bee has indicated that it would accept a cash purchase offer of GH¢6.50 per share.

Required:
Identify whether Ape should proceed with the merger

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers"

  • 20 Marks

AFM – Nov 2015 – L3 – Q5 – Valuation of acquisitions and mergers

Evaluate the acquisition of Anas-Expo Clothing Ltd by Two-Pack Fashion Ltd, analyzing its effect on EPS, shareholders' wealth, and sources of conflict.

You are the Finance Manager of a growing clothing company, Two-Pack Fashion Ltd (Two-Pack). Two-Pack has enjoyed significant growth in recent years using an internal growth strategy. Two-Pack is now seeking to acquire other companies to speed up its growth drive. It has identified Anas-Expo Clothing Ltd (Anas-Expo) as a suitable candidate for takeover. Both companies have the same level of risk.

Anas-Expo produces high-quality handmade clothes, with which it has earned several awards. The company has recorded considerable profits in the past, but its output has dwindled over the past two years due to increasing labour costs. Labour unions have pressured policymakers into amending labour regulations, particularly those relating to pensions and minimum wages, to provide more benefits and protection for workers. Directors of Two-Pack believe that production and profitability of Anas-Expo will be enhanced if its production process is mechanized.

Below are summarized financial data for the two companies immediately before acquisition:

Two-Pack (GHS’m) Anas-Expo (GHS’m)
Sales revenue 285.8
Net operating income 85.8
Interest charges 14.2
Net income before tax 71.6
Corporate tax 15.8
Net income after tax 55.8
Dividends 22.3
Addition to retained earnings 33.5

Two-Pack has 40 million shares and a P/E ratio of 18, while Anas-Expo has 25 million shares and a P/E ratio of 12. Directors of Two-Pack have decided that Two-Pack takes up all the equity shares in Anas-Expo by offering to its shareholders one new share for every share they hold. They have also decided that Two-Pack mechanizes Anas-Expo’s production process immediately at the cost of GHS18 million, replacing work currently done by hand. It is estimated that operational efficiency arising from the acquisition and integration of the two companies would yield after-tax benefits of GHS25 million per year to perpetuity. The cost of capital of Two-Pack is 25%.

Required:

(a) Evaluate the acquisition proposal, and recommend whether the acquisition should go ahead.
(b) Analyze the effect of the acquisition on the earnings per share (EPS) of Two-Pack following the successful acquisition of Anas-Expo.
(c) Analyze the effect of the acquisition on the wealth of the shareholders of each company.
(d) Advise the directors of Two-Pack on three likely sources of conflict in relation to the acquisition of Anas-Expo and the mechanization of its production process, and suggest ways through which the conflict could be avoided or resolved.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2015 – L3 – Q5 – Valuation of acquisitions and mergers"

  • 30 Marks

FM – May 2019 – L3 – Q1 – Mergers and Acquisitions

Evaluate the synergy expected from a proposed merger between Pako Plc. and RT Plc. using free cash flow analysis, and discuss limitations and alternatives.

Pako Plc. will soon announce a take-over bid for Ronke Tina (RT) Plc., a company in the same industry. The initial bid will be an all-share bid of four Pako shares for every five RT Plc. shares. The most recent annual data relating to the two companies are shown below:

The take-over is expected to result in cost saving in advertising and distribution, reducing the operating costs (including depreciation) of Pako from 76% of sales to 70% of sales. The growth rate of the combined company is expected to be 6% per year for four years and 5% per year thereafter. RT’s debt obligations will be taken over by Pako. The corporate tax rate is expected to remain at 30%.

Sales and costs relevant to the decision may be assumed to be in cash terms.

Required:

a. Estimate how much synergy is expected to be created from the take-over, using free cash flow to the firm analysis for each individual company and the potential combined company. State clearly any assumptions that you make.
Note: The weighted average cost of capital of the combined company is assumed to be 9%. (20 Marks)

b. Discuss any five limitations of the above estimates. (5 Marks)

c. Explain, generally, three advantages and two disadvantages of expansion through merger and acquisition rather than through organic growth. (5 Marks)
(Total: 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2019 – L3 – Q1 – Mergers and Acquisitions"

  • 20 Marks

FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions

Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.

Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).

PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”

Summarized financial data for the companies (N Million):

PJP YP
Sales 480.0 353.0
Profit before tax 63.0 41.0
Tax (18.9) (12.3)
Profit after tax 44.1 28.7
Dividends 20.0 11.0
Non-current assets (net) 284.0 265.0
Current assets 226.4 173.0
Total assets 510.4 438.0

Equity and Liabilities:

PJP YP
Ordinary shares (10 kobo par value) 40.0 30.0
Reserves 211.2 192.0
Medium and long-term borrowing 86.0 114.0
Current liabilities 173.2 102.0
Total 510.4 438.0

Notes:

  1. After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
  2. Initial redundancy costs will be ₦10 million before tax.
  3. PJP’s cost of capital is 12%.
  4. Current share prices: PJP = N29, YP = N18.
  5. The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.

Required:

a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions"

  • 15 Marks

FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions"

  • 30 Marks

FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

You are employed by Bolade Plc (BP), a very large printing firm with retail outlets across Nigeria. Its board is considering making an offer to buy 100% of the shares of Kenny Ltd (KL), a competitor of Bolade in Aba. KL’s financial year-end is 28 February, and its most recent financial statements are summarised below:

KL Income Statement for the Year Ended 28 February 2023

Item ₦m
Revenue 17.3
Profit before interest and tax 5.9
Interest (0.3)
Profit before taxation 5.6
Tax at 21% (1.2)
Profit after taxation 4.4
Dividends declared 1.1

KL Statement of Financial Position at 28 February 2023

Item ₦m
Non-current assets:
Freehold land and buildings (original cost ₦4.1m) 3.5
Machinery (original cost ₦8.8m) 5.3
Total Non-current assets 8.8
Current assets:
Inventories 3.0
Receivables 0.5
Cash and bank 2.8
Total Current assets 6.3
Current liabilities:
Trade payables 3.5
Dividends 1.1
Taxation 1.2
Total Current liabilities (5.8)
Net Current assets 0.5
Net assets 9.3
Non-current liabilities:
10% bonds (redeemable 2031) (3.0)
Net assets after non-current liabilities 6.3
Equity:
Ordinary shares of ₦1 each 2.1
Retained earnings 4.2
Total equity 6.3

Additional Information:

KL’s management had some of the company’s assets independently revalued in January 2023. Those values are shown below:

Asset ₦m
Freehold land and building 8.3
Machinery 4.1
Inventories 3.1

The average price/earnings ratio for listed businesses in the printing industry is 9, and the average dividend yield is 6% p.a.
The cost of equity of businesses in the printing industry, taking account of the industry average level of capital gearing, is 14% p.a.

KL’s finance department has estimated that the company’s pre-tax net cash inflows (after interest) for the next four trading years ending 28 February, before taking account of capital allowances, will be:

Year to ₦m
2024 4.6
2025 4.3
2026 5.2
2027 5.7

KL’s existing equipment has a tax written-down value of ₦3.6 million at 28 February 2023. The equipment attracts 18% (reducing balance) tax allowances in every year of ownership by the company, except the final year.

You should assume that KL will not be purchasing or disposing of any machinery in the years 2024-2027 and that it would dispose of the existing equipment on 28 February 2027 at its tax written-down value.

Bolade’s board estimates that in four years’ time, i.e., 28 February 2027, it could, if necessary, dispose of KL for an amount equal to four times its after-tax cash flow (ignoring the effects of capital allowances and the disposal value of the equipment) for the year to 28 February 2027.

Assume that the company income tax rate is 21% p.a.

Required:

Using the information provided, prepare a report for Bolade’s board by:

a. Calculating the value of one share in KL based on each of the following methods:

  • i. Net asset basis (historic cost)
  • ii. Net asset basis (revalued)
  • iii. Price/earnings ratio
  • iv. Dividend yield
  • v. Present value of future cash flows
    (16 Marks)

b. Explain the advantages and disadvantages of using each of the five valuation methods in (a).
(8 Marks)

c. What are the possible benefits from the merger between Bolade Plc (BP) and Kenny Limited (KL).
(6 Marks)

(Total: 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques"

  • 30 Marks

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

The following case relates to a business expansion decision for Abayomi Plc (AP):

Abayomi Plc (AP) is a major electrical company in Nigeria. The directors have recently identified Togo as a priority location for business expansion. Togo uses currency T$. Assume today is 30 August 2021.

Company K3, located in Togo, has been identified as a potential acquisition target. AP already manages two business units in Togo, named K1 and K2, and these have shown strong performance under AP’s ownership.

K3 is particularly attractive to AP because it has its own warehouse, distribution, and logistics network, all of which could be used by K1 and K2, if the acquisition goes ahead. Currently, K1 and K2 send goods to customers from AP warehouses located in Ghana. This involves considerable cost and delay in delivery.

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings 375
Share capital (T$1 ordinary shares) 90
Total liabilities 465
Net assets 180

Additional Data:

AP aims to maintain the same capital structure as AP. That is, gearing (debt/debt+equity) would be 25% based on market values. AP would guarantee K3’s new debt, which can be assumed to have the same risk profile as AP’s debt.

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

  • P/E ratio of 12.
  • Equity beta of 1.7 and debt beta of 0.4.
  • Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

  • P/E ratio of 14.
  • Equity beta of 1.5 and debt beta of 0.3.
  • Gearing (debt/debt+equity) based on market values of 25%.
  • AP pays 6.2% interest on its long-term borrowings.
  • Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

a. Advise on:
i. The types of synergistic benefit that might arise from the acquisition of K3. (8 Marks)
ii. Possible reasons why both one-off and ongoing synergistic benefits might not be achieved to the extent expected. (4 Marks)

b. Calculate:
i. A Weighted Average Cost of Capital (WACC) for use in valuing K3 based on the proxy company’s business and country risk and AP’s capital structure. (6 Marks)
ii. A range of values for the equity of K3 in T$ as at 1 January 2022 using the following methods:

  • Asset basis. (2 Marks)
  • P/E (including bootstrapping). (5 Marks)
  • DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions"

  • 14 Marks

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, the production efficiency of the
combined entity would increase and save the combined business GH¢600,000 in operating
costs each year to perpetuity.
Though Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers"

  • 5 Marks

AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers

Evaluate whether Ape should proceed with the merger by assessing the financial impact and synergy benefits.

Ape has 2,500 shares outstanding at GH¢10 per share. Bee has 1,250 shares outstanding at GH¢5 per share. Ape estimates that the value of synergistic benefit from acquiring Bee is GH¢500. Bee has indicated that it would accept a cash purchase offer of GH¢6.50 per share.

Required:
Identify whether Ape should proceed with the merger

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers"

  • 20 Marks

AFM – Nov 2015 – L3 – Q5 – Valuation of acquisitions and mergers

Evaluate the acquisition of Anas-Expo Clothing Ltd by Two-Pack Fashion Ltd, analyzing its effect on EPS, shareholders' wealth, and sources of conflict.

You are the Finance Manager of a growing clothing company, Two-Pack Fashion Ltd (Two-Pack). Two-Pack has enjoyed significant growth in recent years using an internal growth strategy. Two-Pack is now seeking to acquire other companies to speed up its growth drive. It has identified Anas-Expo Clothing Ltd (Anas-Expo) as a suitable candidate for takeover. Both companies have the same level of risk.

Anas-Expo produces high-quality handmade clothes, with which it has earned several awards. The company has recorded considerable profits in the past, but its output has dwindled over the past two years due to increasing labour costs. Labour unions have pressured policymakers into amending labour regulations, particularly those relating to pensions and minimum wages, to provide more benefits and protection for workers. Directors of Two-Pack believe that production and profitability of Anas-Expo will be enhanced if its production process is mechanized.

Below are summarized financial data for the two companies immediately before acquisition:

Two-Pack (GHS’m) Anas-Expo (GHS’m)
Sales revenue 285.8
Net operating income 85.8
Interest charges 14.2
Net income before tax 71.6
Corporate tax 15.8
Net income after tax 55.8
Dividends 22.3
Addition to retained earnings 33.5

Two-Pack has 40 million shares and a P/E ratio of 18, while Anas-Expo has 25 million shares and a P/E ratio of 12. Directors of Two-Pack have decided that Two-Pack takes up all the equity shares in Anas-Expo by offering to its shareholders one new share for every share they hold. They have also decided that Two-Pack mechanizes Anas-Expo’s production process immediately at the cost of GHS18 million, replacing work currently done by hand. It is estimated that operational efficiency arising from the acquisition and integration of the two companies would yield after-tax benefits of GHS25 million per year to perpetuity. The cost of capital of Two-Pack is 25%.

Required:

(a) Evaluate the acquisition proposal, and recommend whether the acquisition should go ahead.
(b) Analyze the effect of the acquisition on the earnings per share (EPS) of Two-Pack following the successful acquisition of Anas-Expo.
(c) Analyze the effect of the acquisition on the wealth of the shareholders of each company.
(d) Advise the directors of Two-Pack on three likely sources of conflict in relation to the acquisition of Anas-Expo and the mechanization of its production process, and suggest ways through which the conflict could be avoided or resolved.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2015 – L3 – Q5 – Valuation of acquisitions and mergers"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@knowsia.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan