June13/Q2: Hav Co

This is the same question I asked in a different post to John today lol. Also curious to know the answer also 🙂

Dear John,

The June 2013 Question two says ” Calculate the percentage premium per share that Strand Co’s shareholders will receive under each acquisition payment method and justify, with explanations, which payment method would be most acceptable to them. (10 marks)

The December 2012 question three says ” (a) Estimate the percentage gain on a Dentro Co share under each of the above three payment methods.Comment on the answers obtained.”

So in both cases we are told to work out the gain to the company that is being acquired.

So I’m confused when you say that we are looking at it from the point of view of the acquiring company (in Sigra’s case) and don’t understand the logic. Please explain.

” For Hav Co (June 2013) we did in fact in part (b) of the same question forecast the value of the combined company, with synergies and got a value of $ 29,609M (when looking at Hav Co’s point of view on paying the maximum acquisition premium) so then looking at $29,609M we could find the new number of shares in the combined company of 2400M (current number of shares of Hav Co) + 600M (the share for share exchange, new number of issued shares) and therefore the combined company has a share price of $29,609M / 3000M shares = $9.87

And therefore the gain to Strand Co’s shareholders post acquisition would be $9.87*0.5= $4.935= ($4.935+1.33 (cash offer) – $4.78)/$4.78 = 31.1% gain

But the actual gain (as per official answers) is 24.5% so is my above calculation correct? And why did the examiner not follow the above approach? Is my answer valid and acceptable?

Is it that the two approaches are differing because in one question (Sigra) it was a pure share for share exchange and in the other (Hav co) it was a share for share exchange mixed with a cash offer. Could that be the reason?

Hello John but I still don’t get it and can’t sleep at night as thsee doubts really ich me. Could you elaborate or explain to me in a more simpler and understandable way. Is it because Hav Co deals with intangible illectual valuation and therefore it has a different approach. What message are you really putting across here when you say “However in June 2013 it asked which payment method would be most acceptable to Strands shareholders. They won’t be able to know the new value of the shares and so they will likely base it on the existing value.

In Dentro it is not asking what the shareholders might prefer but asking what the gain will end up being.” I don’t get your message here. Please elaborate and clarify .

Thanks.

Hi John,
regarding share for share offer why has the examiner answered that “although the return is lower, strand co’s shareholders become owners of Hav co and have the option to sell their equity immediately.”? Hav company was supposed to acquire Strand co.