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Hi John,
Would you know how to calculate the gain on a acquiree’s share under different payment methods? This is because sometimes (e.g. Siga Co in Q3 Dec 2012) it is to use the new combined company’s share price to be the share price offered to acquiree, but sometimes (eg Q2 in Mar/Jun 2016) it is to use the acquirer’s share price prior to acquisition. I’m unsure which one to use..would you be able to help?
Thank you very much in advance John!
Sorry John..please allow me to rephase the question better..
The share price offered to acquiree is the new combined company’s share price when question requires to calculate the gain in share price for acquiree (e.g. Q1(c-ii) Dec 2018). However for Q2(b) in Mar/Jun 2016, the answers for P/E ratio uses acquirer’s current share price (prior to acquisition) as the share price offered to the acquiree. I’m unsure when to use the combined company’s share price and when to use the acquirer’s current share price..would you be able to help?
Thanks very much in advance again John.
Links to Q2(b) in Mar/Jun 2016:
https://www.accaglobal.com/content/dam/ACCA_Global/Students/prof/p4/Exam%20docs/mj16_hybrid_p4_q.pdfLinks to Q1 (c-ii) Dec 2018:
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p4/exampapers/afm-2018-dec-qp.pdf
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p4/exampapers/afm-2018-dec-ans.pdfIt really depends from whose point of view we are looking.
The acquiring company will be able to estimate future earnings and therefore be able to estimate the future share price after the acquisition.
However if it is the shareholders of the company being acquired that we are considering (because they are making the decision as to whether or not to accept the offer) then they do not have access to the future earnings of the company after the acquisition. So they will be basing their decision on the current value of the acquiring company’s shares.
If it is not clear from the question as to which approach, then state you assumption and you will still get most, if not all, of the marks. (You should always state your assumptions in Paper AFM answers because there is rarely just one correct answer 🙂 )
I think (and I could be wrong, but as an area that has confused me recently and looking at many questions/answers):
i) where evaluating an offer (eg Q Louieed, Makonis), where shares are offered as payment, the target will reference the buyer’s existing share price . As John mentions above, this is the only info they would have when assessing a bid offer.
ii) But any reference to value/gain realised from the combination to either/both sets of shareholders (like Dec 18 q, and commonly asked in M/A qs) – this needs us to assume/imagine the M/A has taken place, and the all shareholders should therefore refer to their share in the new combined company’s equity value..
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