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“The shareholders of the target company will not know what the effect of the synergy benefits will be, and so the minimum that they can be offered is shares in the acquiring company based on the current market value of those shares.
The acquiring company will know what the potential synergy benefits will be, and so the maximum they will be able to afford to offer will be based on the estimated new market value after the acquisition.”
Ok, thank you, that was insightful for me. But how can we calculate it technically? I hope it’s not an improper question. Because some topics are not covered by approved learning providers such as BPP and Kaplan, that can appear in the exam paper. E.g. I couldn’t have found what a “reverse takeover” is, while there was a question of 9 mark worth in the last ACCA Sample Questions (March/June 2017). I mean, they probably assume that students should learn wider than they announce in the schedule.
Anyway, to my question. How technically should we calculate the ratio? Is it right to calculate the minimum share ratio as the backward ratio of share prices of two companies? For eg. A share = $3 and B share = $2, than the ratio is 3:2 but 3 shares of B for 2 shares of A? I’m just thinking aloud.
And how could we calculate the maximum ratio? We know the value of the new company, but we don’t know how much shares we should issue for the acquisition. So, for me it looks like the following equation: V(new) = N(new) * P(new), where V(new) in the value of the new company (that we know) and N and P are the number of shares and the price of a share accordingly. The last two figures depend on one another. Is there any way to resolve the problem?
Firstly, the examiner can only ask what is listed in the syllabus / teaching guide (on the ACCA website), and Reverse Takeovers had been added to the syllabus. Certainly most of the topics should be in your Study texts, but also there had been a technical article on the ACCA website, and you should always read the technical articles – certainly the most recent ten of them.
With regard to your ratios in your example, you need the total value of the A shares to be equal to the total value of the B shares. So with your figures the rate would indeed the 2 A shares for every 3 B shares.
As far as your last point is concerned, the maximum they can afford to offer is the difference between the new total value of the new ‘enlarged’ company less the current total value of the acquiring company. If they were to offer this amount, then the price per share in the acquiring company would remain the same, and you could therefore calculate how many new shares were to be issued. It is difficult to say more without referring to a specific question – so much depends on the exact wording and the information given in the question).
(And do remember, that there is rarely one precise answer to a P4 question – so much depends on assumptions, and so often more that one answer will get the marks. The important thing is to be able to discuss and calculate sensibly and to be able to explain what you are doing, and why 🙂 )
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