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Dear sir, I would like to ask about the method of determining the share price of the combined company in the case of a merger/ acquisition.
I’m referring to Q1 (ii) June 2012 and Q3 (a) Dec 2012, in the case of share for share exchange
In Q1(ii) Jun. 2012, the share price is calculated as (Earnings of combined company/ no. of shares of combined company) x P/E
In Dec 2012, the examiner answer using
share price = Total equity value of combined company/ number of combined shares
I understand both these method make sense, but my question is how do we decide which method to use in the exam? Because I tried to apply both method and the result is different!
For example, Q1(ii) June
According to examiner answer:
Earnings of combined company: 620,000 + 150,000 + 3,200,000 = 3.97m
Shares in combined company: 11.6m
EPS = 34.2c/ share
Share price = 34.2 x 15 (P/E) = 513c
While applying the approach used in Dec 12, I’ve calculate like this:
Equity value of the combined companies:
Mije: 10m shares x $ 4.8 = 48m
Nente: 2.4m shares x $2.9 = 6.96m
Cost synergies: 0.15m
=> Total equity value = 55.11m
No of combined shares: 11.6m
=> share price = 475c
Which is different from the above method.
Same thing, if I apply the earning based method like in June to solve Dec 12 question, the answer is also different from the examiner answer.
It is very confusing which method to use now.
Thank you for your help!
There are a few problems trying to use the December ‘method’ on the June question.
One is that the PE of Nente is going to change (which would affect its share price even ignoring everything else). Another is that the synergies are $0.15M per year (not $0.15M in total value).
The examiner did accept different approaches for both questions, but the clue really is that in the June question the previous part had indicated that he wanted a free cash flow approach. In the December question the clue was that the synergy benefit was a % of the company value.