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Dear teacher,
In the question 3 in Dec 2012 exam, acquisition method were provided. They are include cash offer, share-to-share exchange, and bond offer.
The acquirer can obtain synergies in term of savings if acquisition was succeeded. However, in acquiree’s share valuation for the acquisition, synergies benefit is only taken into account for share offer method.
I don’t understand why?
Synergies can be obtained if acquisition done, it will not depend on whether which method of exchange are used.what the reason here? Sir.
You are looking to the benefit to Dentro’s shareholders.
The benefit of the synergy will affect the value of shares in Sigra if the acquisition goes ahead, and Dentro’s shareholders will only be affected by that if they are given shares in Sigra.
If they take cash or debt, then it is irrelevant to them what the new value of Sigma’s share will be.
As i understood: after merger, they became combined business and expected change in value of Dentro’s shareholder will be measured by value of combined share.
Thank you Mr. Moffat for your helping me :).
The value of the combined business is only relevant to Dentro’s shareholders if they end up with shares in the combined business.
You are welcome 🙂
Dear Mr. John,
Question 2, June 2013 addressed the same issues here. However, the way they deal with them is likely to be less reasonable than previous one, Sigra in Dec 2012.
1. Cash + Share exchange
As I understand and expect, value benefits for Strand’s shareholder will included both value of combined business (based on P/E ratio) and synergies benefits, rather than value of Hav’s shares offered in exchange for Strand’s shares.
However, they take into account none of them.
2. Cash + Convertible bond.
a. They assume bond value is it nominal value, however it is often not the case, especially it is convertible one. As cost of capital provided, i think value of Bond should be calculated by assumption using of cost of capital. Actually i found it unreasonable for using nominal value in this case.b. For redemption value, no value estimation in the period of six year to maturity, I expect and assume no conversion would incur. Are these acceptable?
Please give your advices on there point above!
Many thanks Sir 🙂Your first point is valid (although from the point of view of Hav’s shareholders a lot depends on what information they have when they are considering the offer).
With regard to your second point, it really depends so much on assumptions (as usual in P4, and sensible assumptions still get the marks even though they may result in different figures). What you are saying seems sensible enough.
Thank you, Mr. John,
I supposed my thought should be written down for any reasons. But, in almost case, I found my assumptions are not sound :D.
Once again, thank you Mr. John 🙂
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