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This topic contains 5 replies, has 2 voices, and was last updated by John Moffat 2 months, 1 week ago.

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- July 12, 2018 at 1:14 am
Hi John,

For question Makonis, part b require us to calculate the impact on Makonis equity holder due to the premium. In the answer, for the premium of 30%, it stated: “Makonis Co’s equity holders will receive about $359.94 million or $1.71 per share of the additional value created, which is 29.5% of the current share price”

What I dont understand here is why they take 359.94/current number of share of 210m to calculate additional value to equity holder. The number of share of the combined company after M&A is 210 + (200/2) = 310m shares, with a combined new equity value of $2,201.94m calculated in part a. That mean the each share of combined company will have a price of 2201.94/310 = 7.1, for both Makonis and Nuvola equity shareholders. Therefore, shouldn’t the additional value created for Makonis equity holders be 7.1 – 5.8 = 1.3/share?

In short, the main thing I dont understand here is why the answer used the existing number of shares of Makonis to calculate additional value, while the new share price of combined company is based on new number of share of 310m and Makonis shareholder will enjoy that new price for each of their existing share.

Thank you.

July 12, 2018 at 11:28 amDon’t forget that some of the payment for Nuvola is in cash – it is not only shares.

Having said that, I don’t know which answer you are looking at, because the examiners own answer is not correct (the last line is confusing).

With a 30% premium, the total gain is 503.94 of which 144 (30% x 480) goes to Nuvola shareholders, and the remainder (359.94) goes to Makonis existing shareholders. There are 210M existing shareholders, so they gain 359.94/210 = $1.71 per share.

With a 50% premium, 240 (50% x 480) of the gain will go to Nuvola shareholders, and so the remainder of 263.94 will go to Makonis existing shareholders. So this time they would gain 263.94/210 = $1.26 per share.

So the impact of the higher premium on Makonis shareholders is that their gain is lower by 1.71 – 1.26 = $0.45 per share.

July 12, 2018 at 1:39 pmHi John,

Thanks for your feedback. The part that I dont understand is your 3rd paragraph there. I understand that $359.44m goes to Makonis existing shareholders, but I dont understand how can you take that value divided by 210m to get the increase in share price. Given the share price before the deal for Makonis was $5.8, I don’t think the existing shareholder of Makonis can sell their share to market, after the deal is done, at $5.8 + $1.71 = $7.51 like that.

My understanding here is that right after the premium is paid to buy Nuvola, the combined company will have 310m shares in total and the market will determine each of the share now value at new equity value of $2,201.94m /310m = $7.1/share. This mean that each of the existing 210m shareholders of Makonis now have their shares holding valued at $7.1/share, which is the price that they can sell their share to market. Therefore, the increase in their share price compared to before the deal is $7.1 – $5.8 = $1.3/share.

I hope that I make my point clear enough and hope you can help let me know what is the problem with my understanding here.

Thank you

July 12, 2018 at 3:16 pmI understand your point, and what you are doing would probably get you half of the 5 marks available for this.

However, what you are missing is that the total value of $2,201.94 is the value based on the future earnings and ignores the cash paid out to the shareholders of Nuvola. Whatever cash is paid out will reduce the value of the combined company.

That does however show up an error in what I wrote before (which is the way the BPP answer present it), in that the actual market value per share will be less than $7.10 per share (because of what I have written above).

As a result, what the examiner has done in his answer is better. He does not calculate the new value per share (which was not asked for) but instead simply calculates the difference in the share price between a 30% and a 50% premium – the bigger the premium paid out, the lower the share price.Sorry for causing confusion 🙁

July 12, 2018 at 3:42 pmHi John,

Thanks for the feedback again. I got what you meant now on the lower value due to cash paid.

Just one more note to close this post. As the cash paid will reduce the total value $2,201.94, If I take the new equity value $2,201.94 minus the cash paid, lets say $144 in the case of 30% premium, then I will get $2201 – $144 = $2057. Take this net equity value divided by 310m shares, I get $6.64/share of combined company. Then the increased in share price for existing Makonis holders will be $6.64 – $5.8 = $0.84/share.

The answer may not be the same as the examiner’s answer, but is this an acceptable approach to do in the exam? This way was somehow more understandable to me than the approach of the examiner…., as it calculates the new share price and compare ti previous share price

Thank you for your help.

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