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Hello Sir,
A question in december 2018 exam (in case of acquisition) asked for % gain in value for an acquirer’s & acquiree’s share, given three payment methods, Cash, share for share exchange, and mixed (cash & share based) payment.
What I need to ask is, that in case of the mixed offer, the only difference will be of cash paid, but the shares exchanged should be treated similarly as in a complete share for share exchange, i.e. when aqcuirer gives its shares to the acquiree’s shareholders, they will be treated as shares in the new combined company & thus, the amount of gain (increase in total value of combined company, post acquisition) should also be allocated to acuiree’s, as they are the shareholders of the new company. However, examiner has not included the post acuisition gain, in the calculation of % gain of acquiree company.
The pre acquisition share price of acquirer & acquiree was $2.6 & $3.8.
Post acquisition share price (of combined company) was $2.97.
In a mixed offer, cash of $2.09 and one acquirer’s share was given per aqcuiree’s share.
So calculation of gain should be ((2.09+2.97)-3.8)/3.8=33.2%,
rather than ((2.09+2.6)-3.8)/3.8=23.4%
If you can please help me out.
Thanks.It depends from whose point of view we are looking.
The existing shareholders of the acquiree would not have the knowledge of what would be likely to happen to the post-acquisition share price, and so they are more likely to base their thinking using the current share price of the acquirer.
Then how will we know from whose point of view, we have to calculate, as it is not clear in the question. Also, why in case of a complete share for share exchange, post acquisition gains are considered for calculating acqiree’s gain, in the same question, but in case of a mixed offer (cash & shares) they are completely ignored. Will both answers be acceptable?
Yes – when it is not made clear then you will get the marks for either. Just make sure that (as always) you write down your assumptions so that it is clear to the marker what you are doing 🙂
One more question, that the way we calculate acquiree’s gain will also affect acquirer’s gain, as the same assumption (about transfer of post acquisition value through share exchange) would apply, affecting the amount of synergy gains allocated to aquirer, resulting in a different % gain for acquirer also. Am I correct in my understanding?
Thanks alot 🙂
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