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Hello sir,
In the MJ 2023 Question
This is the information given pertaining to how the acquisition takes place
“The CEO’s proposal for a share-for-share exchange will involve one Fraser Co share being exchanged for three Joshua Co shares. Based on last year’s negotiations, the board believes it has a good understanding of Fraser Co’s expectations. You have therefore been asked to incorporate a minimum acquisition premium of 35% into your analysis, which is the same premium which was requested last year.”The answer finds the post aq val of the two companies by multiplying the total eq mv of combined company by the proportion of shares held by the SH of the two companies.
But since the min required premium is given, I thought 35% the total val generated must be the gain for the target company and the rest for the Acquirer.
Could you please tell me why that is wrong and where exactly the premium is incorporated when it is a share for share exchange.Thank you.
A quick follow up:
This might be silly but does the mv of the combined company vary from the calculated val only during a cash offer? When there is a share for share offer regardless of the premium required will the total eq mv val of the new company be equal to what was computed from cash flows ?The premium is the amount in excess of the current value of the shares (it is not a % of the total value generated).
The value of the company as a whole will be the same, but obviously the value per share will be affected.
So for this question could I have taken the % on current mv of Fraser as the increase in val for SH of Fraser? Because in the answers they have retrospectively assessed that the premium calculated is more than 35%.
You could have, but since it refers to a minimum premium that is why the examiner calculates it and checks it is more than the 35%.
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