Eg. Question “Doubler”
Premium paid for Fader in excess of the current market price: 290x30m x 2/3 – 180x30m = (4,000,000)
Which exam is the question from?
By Kaplan revision kit, it is for Jun07. But Kaplan did not minus $4,000,000. It was my lecturer’s notes. But I have difficulty to ask him now since he taught me one year ago.
I have found the question, but since the takeover is by issuing shares, there is no cash flow (and your premium is irrelevant).
If you own shares and I buy them from you, I can value them at any price I want to. Whether you accept my offer is another matter. If I am prepared to offer more than the current market value then fine – you make a profit, but as far as I am concerned, what I pay is what they cost.
Here they are not buying the shares for cash – they are giving the shareholder shares in Doubler. At current price this means that the shareholders in Fader are making a profit (although appreciate the Doubler’s share price will change after the acquisition) but any profit made by Fader’s shareholders is of no relevance to Doubler. (If Fader’s shareholders did not think they would be making a profit, they would likely refuse to sell!)
Can acquisition by issuing shares be broken into two stages?
Stage 1: debit cash, credit share cap
Stage 2: debit investment, credit cash
From double entry point of view, it looks like my former lecturer’s suggested ans is also justifiable.
Kindly give a final conclusion, as $4,000,000 is really a big amount. If I were a financial manager, I must be very sure for this.
You can break it into two stages – the end result is fine – but it would not be like that it real life (and you will not be expected to do the debits and credits in the exam).
I agree – $4M is a big amount – however it is not relevant to the acquiring company how much profit the shareholders of the target company are making.
If I pay you $10M for something that is currently valued by you at $6M, then as far as I am concerned I have bought assets worth $10M. For me they are worth $10M otherwise I would not have paid that much. I do not care how much you might have thought it was worth or how much profit you might have made from the deal.
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