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Dear John, hope you are well,
I have a question regarding Opao Co (2018 DECQ1), it requires us to calculate the percentage gain in value for Opao and Tai.
when calculating the gain to Opao in a cash offer, my calculation is as follows:
1) the combined company share price = total combined company value 6720m/ total share 2263m = 2.97,
2) use this value to get gain to Opao Co = (combined company value 2.97 – pre-acquisition value 2.5)/2.5=18.8%, so the percentage gain to Opao is 18.8%the rationale for using the combined company value here is that I think the combined company is essentially Opao Co.
I know I can get gain to Opao by simply using synergy- gain to Tai, but I also want to understand how to get it in another way. I know it is incorrect, but can you help where I get wrong please?
Thanks in advance!
I want to add on that the reason why I used combined company to calculate the answer is that I learned from Selorne Co where the value of Chawon after acquisition = combined company value *share number.
Thanks again!
There are two problems in what you are doing for the cash offer.
One is that there will still on be 2,000M shares in the combined company (because they are paying cash for Tai and then cancelling the shares in Tao).
The other is that although the value of the combined company is indeed 6,720 million, out of this they are paying 263 million x $4,40 = $1157.20 for the shares in Tao. This leaves the shares in Opao as having a value of (6720 – 1157.2)/2,000 = $2.78 per share.
So the % gain to Opao’s shareholders is (2.78 – 2.50)/2.50 = 11.2%
Thanks John! it makes sense now for the cash offer!!
I followed the way you did to do the mixed offer, but my calculation is still incorrect, do you mind having a look as well and pointing out the issue for me please, thanks a lot!
mixed offer:
1) share volume = 2263M
2) share price for the combined company = 2.6 * 2263 – 263 *2.09+720 synergy=6054
percentage gain = (6054/2263-2.5)/2.5=7%
Thanks again:)
another way I can think of doing it is as follow:
1) share volume =2263M
2) combined company value = 6720m – 2.09*263 = 6170.33M
3) hence the share value is 6170.33/2263=2.73 per share
4) percentage gain = (2.73-2.5)/2.5=9.2%this way of doing it resembles John your solution, but it completely ignores the share price of 2.6 given in the question.
I have tried so many different ways of calculating it, but I didn’t quite get it right.
To be honest, the examiners answer does rather contradict what is written in the question.
Given that the question states that the share price will become $2.60 per share, what you could have done is simply stated the % gain as being (2.60 – 2.50)/2.50 = 4%. This is obviously completely different from the % in the answer, but you would have to get the marks for it 🙂
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