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requirement (c) option 2, there is cash and share offer against shares of strand co.
in standard answer the value of shares offered to strand co shareholders is 9.24 which is M.V of Hav co share, should not this value be M.V of combined company share? as the share that will be given to strand co will ultimately be the share of combined company?
Yes, and No 🙂
What you say is in some ways correct (and would be a good point to mention).
However, because the question asks which is likely to be the most acceptable to Strand’s shareholders, imagine you were a shareholder in Strand.
You receive a letter offering you shares in the Hav, and surely what you would look at immediately is how much shares in Hav are currently worth. You might think that the shares will end up higher in value (or for other reasons could end up being lower in value) but you are not in a position to calculate what should happen to Hav’s share price. You would really be forced to make the decision based on the current price.
Assuming that i will accept the offer as a strand co shareholder, if the said acquisition goes ahead then there will be no Hav Co, rather a combined company made up of both these companies. So the share i will have as a payment of acquisition will be share of that combined company.
I Agree that we won’t be able to establish the future share price but in many other questions related to merger and acquisition the value that was used was combined share value..
even in standard answers.. such as December 2012 Sigra Co, where share for share exchange was compared using M.V of share of combined company to the M.V of Dentro (Acquiree) in order to establish gain for the acquiree’s shareholders.
So if we assume that shareholders don’t have this information then why was this the case in Sigra Co. Infact i solved many other questions but only this Hav Co is the question where M.V of Hav co existing share was used rather than expected share price of combined company.
Would i score any marks if i were to solve it either way and state otherwise?
You are going to hate my answer 🙁
Although the questions are almost identical in wording, they are not quite the same.
Sigra specifically asks you to calculate what the gain to the shareholders will be.
The other question, although it asks for the premium, it is because it is asking which of the choices are the shareholders likely to accept.However, you would definitely score high marks, if you did differently (assuming your calculations were OK).
There is hardly ever just one ‘correct’ answer to a P4 question. So much always depends on assumptions (as it does in real life). Even with straight NPV questions, there is never just one ‘correct’ answer (there is at F9, but not at P4).Fortunately the P4 markers are good and they understand the subject well. The marks are not for getting the same answer as the examiners answer, but for proving you understand what you are doing. Provided that what you are doing is sensible, and that you state your assumptions then you can still get full marks (assuming that your assumptions are of course reasonable and your calculations are correct based on your assumptions).
Got it, thanks 🙂 so basically it was the perspective, In Hav Co we are calculating the gain from shareholder’s perspective hence they don’t have that information about future, while in Sigra the perspective is our as we do posses that information ( i guess )
thanks to captmario for raising this question and also thanks to John for clearing that up 🙂
Sir ,
part b) $1697.7 is additional value created isnt it?
why is it written as premium?
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