exam - mergers and acquisitions

NPV - wk 10 tutorial

• santiago plc is considering a merger with snider plc, a smaller firm in the same industry

• santiago plc will be acquiring snider plc

• the merger is expected to generate cost savings of 5 mil. per annum in perpetuity

• these cost savings, along with the cash flows of both companies, should be discounted at a rate of 10% per annum

• santiago plc is evaluating two possible bids for acquiring snider plc:

a. calculate the cost and NPV of the merger to santiago plc under both the cash and share exchange offers

st.1 → calculate market values before the merger

• market value → current share price x no. of shares

• santiago plc. = 10 × 50 mil. = 500 mil.

• snider plc. = 2 × 10 mil. = 20 mil.

st.2 → calculate present value of gains from merger

gain = 5 mil. per yr in perpetuity, discounted at 10%

• PV of gains = 5 mil. / 10% = 50 mil.

• combined value post-merger = 500 + 20 + 50 = 570 mil.

part. i. cash offer

st.3 → cost of acquisition

santiago pays £4 per share for 10 mil. snider shares:

• 10 mil. x 4 = 40 mil. → [how much santiago is offering]

• cost = extra amount santiago is offering above what snider is worth on the market

• cost = 40 mil. - 20 mil. = 20 mil.

  • snider market value = 20 mil.

st.4 → NPV of the merger

NPV = gains - cost

• NPV = 50 mil. - 20 mil. = 30 mil.

part. ii. share exchange offer

st.5 → determine no. of new santiago shares issued

for every 5 snider shares, 2 santiago shares are offered:

• 2/5 × 10 mil. = 4 mil. new shares issued

  • there are 10 mil. snider shares

st.6 → new total santiago shares after merger

• new total santiago shares after merger = no. of santiago shares + new shares

• = 50 mil. + 4 mil. = 54 mil.

• new share price of santiago post merger = 570 mil. / 54 mil. = £10.56

  • 570 mil = total combined value [st.2]

st.7 → cost of the merger via shares

• no. of shares x new share price = 4 mil. x 10.56 = 42.22 mil.

• cost = 42.22 mil. - 20 mil. = 22.22 mil.

  • 20 mil. → snider market value

• NPV = 50 mil - 22 mil. = 27.78 mil.

valuations [pricing] - wk11 tutorial

• you are given that brandt ltd has:

  • 500,000 shares in total

  • net assets = 10 mil.

  • dividend = £2 per share

  • earnings of past 5 yrs:

• similar firms:

  • earnings yield = 15%

  • dividend yield = 10%

  • 5 years’ purchase of super profits

• normal rate of return on net assets = 15%

a. calculate the value of one ordinary share in brandt ltd using each of the following methods:

maintainable earnings method

st.1 → calculate average earnings

• 5 + 1 + [-2] + 1 + 1 = 6 mil.

• 6 mil. / 5 = 1.2 mil.

st.2 → capitalise average earnings using earnings yield of 15%

• 1.2 mil. / 15% = 8 mil.

st.3 → value per share

• 8 mil. / 500,000 = £16

  • 500,000 = no. of shares

dividend yield method

• dividend per share = £2

• dividend yield = 10%

• £2 / 10% = £20

asset value method

• given info:

  • net assets = 10 mil.

  • shares = 500,000

• value per share = 10 mil. / 500,000 = £20

super profits method

st.1 → calculate super profits earning:

• super profits = maintainable earnings - normal earnings

• super profits = 1.2 mil. - 1.5 = -300,000

  • normal earnings = 15% x net assets

  • normal earnings = 15% x 10 mil. = 1.5 mil.

  • maintainable earnings = 1.2 mil.

st.2 → capitalise super profits using 5 yrs purchase:

• -300,000 × 5 = -1.5 mil.

st.3 → add net assets:

• [-1.5] + 10 = 8.5 mil.

st.4 → value per share:

• 8.5 mil / 500,000 = £17

berliner method

the berliner method takes the average of 2 valuations:

• maintainable earnings method value = £16

• asset value method value = £20

• [16 + 20] / 2 = £18