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“(b) Calculate the P/E ratios of Tidded Co implied by the terms of Louieed Co’s initial and proposed offers, for all three of the above options.”
sir in this question’s part b) we use pre-acquisition MV/share of Louieed to make the comparison with share-for-share and mixed offer, to arrive at implied P/E of target co. So my doubt here is that, why did we not use post-acquisition MV/share of Louieed, which we could have found by multiplying combined earnings per share with post-acq P/E?
Is it because the marks were less, so we should have assumed that it will be direct. Or that whenever the question asks for forecasted or implied P/E we use Parent’s independent figures?
Although the fact that there are only 5 marks is a ‘clue’, the real reason is that the question is not asking what the new PE ratios will actually be, but what PE ratios are implied (suggested) by the offer.
Although you have a valid point.
But my argument is that won’t the offer be based on combined MV per share, inclusive of all synergies? So we should be taking that, right? for comparison purposes.
I understand what you mean, but appreciate that because Tidded rejected the initial offer they are now considering a new offer in the hope that Tidded will then accept it.
From Tidded’s point of view they will be looking at the current share price of the Louieed shares because they will not have the information available to estimate what will happen to the share price after the acquisition. Ignoring any other factors, they will prefer whichever implies the highest PE ratio,
doubt 1- based on above answer) Oh so the implied PE calculation will be done by target’s shareholders, is that the case?
doubt2- based on initial comments mentioned in part c of this same question )
“The calculations suggest that if Tidded Co’s shares are acquired on a share-for-share exchange on the terms required by its shareholders, Louieed Co’s shareholders will suffer a fall in earnings per share attributable to them from $0.87 to $0.85. This is because Tidded Co is being bought on a higher price-earnings ratio than Louieed Co and the synergies arising from the acquisition are insufficient to compensate for this.”
Sir the reasoning of the fall in EPS is unclear to me. I don’t understand how buying target at a higher PE will impact adversely the combined EPS? Really scratching my head at this point.
1. It will not necessarily be done by anyone – we are doing it because of what the question was asking. However the target’s shareholders are likely to be interested in it.
2. Given that the PE ratio is the price dividend by the earnings, then if the PE ratio is higher then the EPS will be lower (given that they will be giving the same 2 shares for 1 whatever happens).
Sir, let’s say just for the sake of argument, If Louieed Co’s P/E ratio were to change after the acquisition, then to calculate the value of the combined entity we apply NEW P/E to the new earnings right?
i.e. If the we the shareholders of Tidded Co accepts cash offer,
NEW P/E ratio – 16 [ answer derived from part (b)]
NEW Total Earnings – $326.8m [ answer derived from part (c)]then the total value of the combined entity would be = $5228.8m ( 16x $326.8m )
Sir pls correct me if my understanding on above is incorrect?
Have a good day!
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