Topic: Mergers and acquisitions

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  • 20 Marks

FM – May 2016 – L3 – Q4 – Mergers and Acquisitions

Estimating the additional equity value created by combining two companies and analyzing the impact of premium increases on shareholders.

Eko Product Plc (EP Plc) is a producer of a variety of vegetable oil and other household products in Lagos. The company presently faces significant competition in the market for one of its major raw materials – palm oil. To secure a regular flow of the raw material, the Directors of EP Plc are now considering making an offer for the entire share capital of Benin Oil Plc (BO Plc), a palm oil producing company in Benin.

The following financial information is provided for the two companies:

Parameter EP Plc BO Plc
Equity beta 1.2 1.2
Asset beta 0.9 1.2
Number of shares (million) 210 200
Current share price N29 N12

It is thought that combining the two companies will result in several benefits. It is estimated that combining the two companies will generate free cash flow to the firm (FCFF) of N1,080 million in current value terms, but these will increase by an annual growth rate of 5% for the next four years before reverting to an annual growth rate of 2.25% in perpetuity. In addition to this, combining the companies will result in cash synergy benefits of N100 million per year for the next four years. These synergy benefits are not subject to any inflationary increase, and no synergy benefits will occur after the fourth year.

The debt-to-equity ratio of the combined company will be 40:60 in market value terms and it is expected that the combined company’s cost of debt will be 4.55% before tax.

The income tax rate is 20%, the current risk-free rate of return is 2%, and the market risk premium is 7%. It can be assumed that the combined company’s asset beta is the weighted average of EP Plc’s and BO Plc’s asset betas weighted by their current market values.

EP Plc has offered to acquire BO Plc through a mixed offer of one of its shares for two BO Plc shares, plus a cash payment, such that a 30% premium is paid for the acquisition. Shareholders of BO Plc feel that a 50% premium would be more acceptable. EP Plc has sufficient cash reserves if the premium is 30%, but not if it is 50%.

You are required to:

(a) Estimate the additional equity value created by combining EP Plc and BO Plc based on the free cash flow to firm method. Comment on the results obtained and discuss briefly the assumptions made. (11 Marks)

(b) Estimate the impact on EP Plc’s equity holders if the premium paid is increased to 50% from 30%. (5 Marks)

c. Estimate the additional funds required if a premium of 50% is paid instead of 30% and discuss how this premium could be financed. (4 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q7 – Mergers and Acquisitions

Advise on the benefits, drawbacks, alternatives, and target selection criteria for expansion through mergers or acquisitions.

One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.

Inkline Plc. is one of your client companies intending to expand its business by means of merger or acquisition. Your firm of management consultants has been asked to advise the management of the company on what steps to take while considering the merger and acquisition methods, and whether it should go ahead with the expansion programme or otherwise.

Required:

a. (i) FOUR benefits derivable from its proposed means of expansion. (4 Marks)
(ii) THREE probable demerits of employing its proposed method of expansion. (3 Marks)

b. TWO alternatives to merger and acquisition in your report. (2 Marks)

c. Where the company decides to go ahead with either of these methods, indicate THREE criteria the company may consider in choosing its target company. (6 Marks)

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  • 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)

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Syntax Plc., a fertilizer company, is concerned about fluctuating sales and earnings. This caused the management of the company to consider acquisition of another company in the same line of business.

In order to boost its sales and stabilize its earnings, Syntax Plc.’s management has identified Synapse Chemical Company Plc. as a possible target. Syntax proposed to acquire Synapse for a consideration of N20 million, which was agreed to by both companies.

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year Revenue (N’m) Cost of Sales (N’m) Other Expenses (N’m) Depreciation (N’m) Total Expenses (N’m) Profit Before Tax (N’m)
2015 60 30 15 5 50 10
2016 70 35 15 4 54 16
2017 78 39 15 4 58 20
2018 86 43 15 4 62 24
2019 94 47 15 4 66 28

The following information is relevant:

  1. The forecast profits have been limited to five years.
  2. All sales are for cash.
  3. The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
  4. Synapse currently has a tax liability of N4.5 million due for payment in 2015.
  5. The interest charges of N1 million of Synapse Plc. have been included in other expenses.
  6. In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

The management of Syntax Plc. has asked you, as a Financial Expert, to appraise the intended acquisition of Synapse Chemical Company Plc. and advise on the reasonableness of the acquisition. Your advice should be in the form of a report to the Board of Directors of Syntax Plc.

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  • 20 Marks

FM – May 2021 – L3 – Q5 – Mergers and Acquisitions

Evaluate takeover bids from shareholder perspectives, assess failure to achieve synergies, and suggest risk minimisation steps.

Ponk Plc is a market research company. It has seen significant growth in recent years and obtained a stock market listing 5 years ago. Due to current economic and political turmoil in the country, there has been a significant drop in revenue and profit.

Ponk Plc is planning a takeover bid for XY, a rival market research company specialising in the telecommunication industry – an industry that has been very resistant to the current economic turbulence in the country. XY has an advanced information technology and information system which was developed in-house and which Ponk Plc would acquire the rights to use. Ponk Plc plans to adopt XY’s information technology and information system following the acquisition, and this is expected to be a major contributor to the overall estimated synergistic benefits of the acquisition. These benefits are believed to be worth ₦8 million (in cash flow) at the end of the first year of acquisition and growing annually at 5%.

Ponk Plc has 30 million shares in issue and a current share price of ₦69 before any public announcement of the planned takeover.
XY has 5 million shares in issue and a current share price of ₦128.40.
It is believed that the WACC of the combined company will be 15% p.a.

The directors of Ponk are considering 2 alternative bid offers:

  • Bid offer 1 – Share-based bid of 2 Ponk Plc shares for each of XY share.
  • Bid offer 2 – Cash offer of ₦135 per XY share.

Required:

a. Assuming synergistic benefits are realised, evaluate bid offer 1 and bid offer 2 from the viewpoint of:
(i) Ponk’s existing shareholders
(ii) XY’s shareholders. (6 Marks available for calculations)

b. Advise the directors of Ponk Plc on:
(i) The potential impact on the shareholders of both Ponk and XY of not successfully realising the potential synergistic benefits after the takeover. (6 Marks)
(Up to 4 marks are available for calculations)

(ii) The steps that could be taken to minimise the risk of failing to realise the potential synergistic benefits arising from the adoption of XY’s information technology and information system. (4 Marks)

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  • 15 Marks

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Obong plc recently received a takeover bid from Abdul plc. If the bid for Obong plc is successful, it will provide Abdul plc the needed competitive edge in research and development to expand its laboratories into the production of the COVID-19 vaccine.

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

b. If Obong plc accepts the bid from Abdul plc, it is estimated that the new growth rate will rise to 12% for the first 3 years and thereafter stabilize at 7%. Calculate the new share price to the shareholders of Obong plc. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

d. According to Efficient Market Hypothesis (EMH), it is believed that the market would react instantly and accurately to the merger announcement between Obong plc and Abdul plc.
Define briefly the THREE forms of EMH and their implications to the market. (9 Marks)

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  • 4 Marks

FM – May 2023 – L3 – Q1b – Mergers and Acquisitions

Discuss the typical factors included in takeover regulations across countries.

b. The regulation of takeovers varies from country to country.

Outline the typical factors that such a regulation includes. (4 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – Q7 – Mergers and Acquisitions

Advise Inkline Plc on expansion through mergers or acquisitions, potential benefits, demerits, alternatives, and target criteria.

One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.

Inkline Plc, one of your client companies, is intending to expand its business by means of a merger or acquisition. Your firm of management consultants has been asked to advise the management of the company on what steps to take while considering the merger and acquisition methods and whether it should go ahead with the expansion program or otherwise.

Required:

(a) Advise your client on:
(i) Four benefits derivable from its proposed means of expansion. (4 Marks)
(ii) Three probable demerits of employing its proposed method of expansion. (3 Marks)

(b) State two alternatives to merger and acquisition in your report. (2 Marks)

(c) Where the company decides to go ahead with either of these methods, indicate three criteria the company may consider in choosing its target company. (6 Marks)

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  • 20 Marks

FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions

Advise on financial synergies from KP's acquisition of TE and evaluate cash vs. share-for-share offers.

You run a financial consultancy firm and have been approached by a new client for advice on a potential acquisition. Kola Plc (KP) is a large engineering company that was listed on the stock market ten years ago, with the founders retaining a 20% stake in the business. KP initially experienced rapid growth in earnings before tax, but soon after listing, competition intensified, leading to a significant decline in growth, which currently stands at 4%. Concerned about limited future growth opportunities, the board has decided to adopt a market development strategy for growth by acquiring companies in less competitive regions using KP’s significant cash reserves. The board has identified Temidayo Engineering (TE) as a potential acquisition target.

Temidayo Engineering (TE):

TE is a private engineering company established eight years ago, with early accumulated losses that have now turned profitable, achieving an 8% annual growth in earnings before tax. Cash reserves remain low, and capital access has been a constraint on TE’s investment potential. The founders and their families own 70% of the shares, while a venture capitalist holds the remaining 30%.

Acquisition Information:

KP’s board prefers that TE’s founders remain as directors post-acquisition and has sufficient cash reserves to purchase TE outright. A cash offer of ₦13.10 per share is considered likely to encourage TE’s shareholders to approve the acquisition. Alternatively, KP’s board is exploring a share-for-share exchange to preserve cash for future acquisitions and dividends. Recent mergers in the industry have attracted a 25-30% acquisition premium, with TE’s shareholders expecting a premium towards the higher end for a share-for-share offer. KP has asked you to design a share-for-share offer scheme with a 30% premium.

Extracts from the Latest Financial Statements:

Additional Financial Information:

  • KP has ₦0.50 ordinary shares totaling ₦7,500 million, with each share trading at ₦5.28. It is expected that KP’s price-to-earnings (P/E) ratio will increase by 10% if the acquisition proceeds.
  • TE upgraded its main manufacturing facility last year, expecting annual pre-tax cost savings of ₦50 million from the current financial year. TE has ₦0.25 ordinary shares totaling ₦700 million. TE’s P/E ratio is estimated to be 20% higher than KP’s current P/E ratio based on comparable company analysis.
  • KP’s CEO estimates annual pre-tax revenue and cost synergies of ₦304 million post-acquisition, while the finance director anticipates additional pre-tax financial synergies of ₦106 million, though cautiously, following reports that many acquisitions overestimate synergies. The tax rate is 20%.

Required:

a. Discuss possible sources of financial synergy arising from KP’s acquisition of TE. (6 Marks)

b. Advise the directors on a suitable share-for-share exchange offer that meets TE’s shareholders’ criteria and calculate the impact of both cash and share-for-share offers on the post-acquisition wealth of KP’s and TE’s shareholders. (14 Marks)

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  • 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)

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  • 14 Marks

FM – March 2023 – L2 – Q2a – Mergers and acquisitions

Calculate the combined company's EPS, weighted average P/E ratio, market value per share, total market capitalization, and the premium received by Finkyim Ltd.

Panpana Ltd is operating in the same industry as Finkyim Ltd, but Finkyim Ltd is experiencing leadership crisis leading to poor performance. Panpana Ltd, upon realizing this, is putting up a bid to take over Finkyim Ltd. It has been agreed that Panpana Ltd will pay 0.7 of its own shares for each of the shares in Finkyim Ltd. This acquisition has no economies of scale and operating synergy. The relevant financial data of the two companies are as follows:

Panpana Ltd Finkyim Ltd
Net Sales GH¢503,000 GH¢178,000
Profit After Tax GH¢88,000 GH¢18,000
Number of Shares 18,000 4,500
Price per Share GH¢50 GH¢30
Price-Earnings (P/E) Ratio 10 8

Required:
i) Calculate the Earnings per Share (EPS) for the combined company. (3 marks)
ii) Calculate the Weighted Average P/E ratio for the combined company. (3 marks)
iii) Calculate the Market Value per Share for the combined company. (2 marks)
iv) Calculate the Total Market Capitalization for the combined company. (2 marks)
v) Calculate the Premium received by Finkyim Ltd. (4 marks)

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  • 12 Marks

FM – April 2022 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the possible prices for Blanco Ltd to offer for Zinko using three valuation methods, discuss the issues Zinko may have with these methods, and outline benefits to Blanco Ltd from the acquisition.

Blanco Ltd is listed on the Ghana Stock Exchange (GSE) and is also included in the Ghana club 500 companies. In its recently published accounts, the directors indicated that as part of their growth strategy, the company is negotiating to take over the business of Zinko Enterprise (Zinko), a start-up business in the industry.

Blanco Ltd has in issue 2,480,000 ordinary shares with each share earning approximately GH¢0.79 to give a Price-Earnings ratio of 8. Shareholders expected rate of return is 18%.

The books of Zinko also show that the company has in issue 1,456,000 ordinary shares. The Company’s earnings have increased significantly in the last 4 years from GH¢300,000 to GH¢455,000. The dividend pay-out ratio has been consistent at 45% as a strategy to pay enough funds to shareholders and generate internal resources for future expansion projects. Shareholders expected rate of return is 20%.

Blanco Ltd has estimated that upon completion of the acquisition, the Zinko line of business would generate annual cashflow of GH¢682,500 in the first year, and after that grow at an annual rate of 5% into perpetuity. The investment required for the acquisition will be GH¢1,230,000. However, the funds for this investment would be raised at a cost of capital of 20%.

Required:
a) Use the following valuation methods to estimate the possible prices that Blanco Ltd can offer for the acquisition of Zinko:
i) Price-Earnings ratio
ii) Dividend growth model
iii) Discounted Cashflow (12 marks)

b) Discuss TWO (2) key issues that Zinko management may have with each of the valuation methods used above. (6 marks)

c) Discuss FOUR (4) possible benefits that will accrue to Blanco Ltd if it acquires Zinko. (2 marks)

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  • 20 Marks

FM – AUG 2022 – L2 – Q2 – Mergers and acquisitions

Evaluates the reasons for failure in mergers and acquisitions, and the financial calculations related to an acquisition.

a) Mergers and acquisitions are business strategies used to achieve various synergies. However, it is observed that there are instances where the desired results are not achieved after the mergers and acquisitions have taken place.

Required:
Explain THREE (3) reasons why mergers and acquisitions fail to achieve the desired results. (6 marks)

b) Mako Ghana Ltd is a company in Ghana operating in the Manufacturing industry and currently valued at GH¢200 million. Jini Ltd is also operating in the same industry but on a smaller scale and is currently valued at GH¢80 million. Due to growing challenging operating environment currently, the shareholders of both companies agreed to a 100% equity acquisition of Jini Ltd by Mako Ghana Ltd.

A detailed research and analysis by the Finance team of Mako Ghana Ltd shows the following:

  • There will be incremental operation cost of GH¢40 million per annum in perpetuity due to the increased number of branches.
  • The combined company’s market share will improve by 15% per annum on the average leading to incremental revenue of GH¢160 million per annum in perpetuity.

Based on the analysis above, both parties agreed to seal the deal under the following payment terms:

Option One:
Mako Ghana Ltd to pay GH¢170 million in cash for the 100% equity of Jini Ltd.

Option Two:
Mako Ghana Ltd to offer 25% of the combined company’s equity to shareholders of Jini Ltd as the payment for the 100% equity.

The cost of capital of Mako Ghana Ltd is 15% per annum.

Required:
i) Calculate the gains from the acquisition for Mako Ghana Ltd. (4 marks)
ii) Calculate the cost of the acquisition to Mako if cash is paid under Option one. (4 marks)
iii) Calculate the cost of the acquisition to Mako Ghana Ltd if the 25% of the combined equity is used for the payment under option two. (6 marks)

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  • 10 Marks

FM – Nov 2019 – L2 – Q2b – Mergers and acquisitions

Determine the extent to which Powell's shareholders will benefit from the proposed merger.

Global companies continuously explore ways to be more efficient and effective to survive the challenging global competition. Some resort to mergers and acquisitions to survive. In the light of this, Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:

Carsley Ltd Powell Ltd
Number of shares 40m 10m
Annual earnings GH¢10m GH¢5.8m
P/E ratio 8 10

Post-merger annual earnings of the enlarged company are expected to be eight percent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac Plc.

Required:
Determine the extent to which the shareholders of Powell will benefit from the proposed merger. (10 marks)

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  • 20 Marks

FM – NOV 2021 – L2 – Q2 – Business valuations | Mergers and acquisitions

Valuation analysis and recommendation for Mr. Asare Jones on offers received for his unlisted company, including a comparison between company value and market capitalisation.

Mr. Asare Jones inherited the Mindsworth Textile Company Ltd (Mindsworth), an unlisted company, from his Father. The company has 1,000,000 shares which are solely owned by Mr. Asare Jones. For the past five years, profits have fallen below the industry average, with a growth rate of only 2%, while the industry average is more than twice this rate.

Mr. Asare Jones has been approached by Indiana Textiles Ltd (Indiana), a competitor, with a bid to take over the assets and liabilities of Mindsworth in exchange for 800,000 shares in Indiana. The shares would add up to Indiana’s existing 7,200,000 shares. Indiana’s shares are currently valued at GH¢9.50 per share.

Meanwhile, Obiba Management Associates (OMA), a corporate finance consultancy firm, has offered GH¢3,000,000 to take up 49% of the shares of Mindsworth and grow the company’s current earnings of GH¢850,000 per the last financial year by 5% in the first three years and after that, 3% into perpetuity.

Mr. Asare Jones, after assessing the risks associated with the various options, has revised his current expected rate of return of 15%. This is to increase by three percentage points for the offer from Indiana and five percentage points for the offer from OMA.

Required:
a) With appropriate computations, advise Mr. Asare Jones on the following:
i) The benefits and risks associated with each of the options available, including not accepting any of the offers. (12 marks)
ii) Advise on the best option to take. (2 marks)

b) Distinguish between the value of a company and the market capitalisation of a company. (3 marks)
c) Explain THREE (3) challenges Mr. Asare Jones will face with the valuation of his unlisted company in the textile industry. (3 marks)

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  • 10 Marks

FM – Nov 2019 – L2 – Q2a – Mergers and acquisitions

Explain the justification for horizontal, vertical, and conglomerate integration strategies in mergers and acquisitions.

Global companies continuously explore ways to be more efficient and effective to survive the challenging global competition. Some resort to mergers and acquisitions to survive. In the light of this, Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:

Carsley Ltd Powell Ltd
Number of shares 40m 10m
Annual earnings GH¢10m GH¢5.8m
P/E ratio 8 10

Post-merger annual earnings of the enlarged company are expected to be eight percent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac Plc.

Required:
a) Explain to the stakeholders of both companies the justification for the following integration strategies in mergers and acquisitions: i) Horizontal takeover (4 marks)
ii) Vertical backward and forward takeovers (4 marks)
iii) Conglomerate mergers (2 marks)

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  • 20 Marks

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Olongon Plc (Olongon) and Kwatrikwa Plc (Kwatrikwa) are competitors listed on the Ghana Stock Exchange. Due to poor managerial decisions, Kwatrikwa’s earning power has been uncertain in recent years, making shareholders contemplate selling the business. However, the management of Kwatrikwa has used various defensive tactics to block any takeover they perceive to be hostile. In the just-ended Annual General Meeting (AGM), Kwatrikwa’s shareholders resolved to sell the company. Shareholders of Olongon have expressed interest in acquiring Kwatrikwa and have suggested to the board to put a proposal together for consideration in the next extraordinary meeting. Olongon’s board has gathered the information below to guide the drafting of the proposal:

Company Olongon Kwatrikwa
Earnings per share (GH¢) 0.50 0.50
Retention ratio 0.60 0.40
Price per share (GH¢) 10.00 5.00
Number of shares 25,000 25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

b) Assuming the share price of the combined business after the acquisition is the same as the share price of Olongon, calculate the market value, earnings per share, and the Price/Earnings ratio of the combined business.
(6 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

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