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Company A has 200m shares with a current market value of $4 per share. Company B has 90m shares with a current market value of $2 per share.
Company A makes an offer of 3 new shares for every 5 currently held in Company B. Company A has worked out that the present value of synergies will be $40m.
Required:
Calculate the expected value of a share in the combined company (assuming that the given share prices have not yet moved to anticipate the takeover), and advise the shareholders in Company B whether the offer should be accepted.
sir given that market cap of B and synergies together= $180m+$40m=$220m
so the no.of shares issued should to the target company shareholders should be 220m/4=55m shares, right ?? but they are offering only 54m(i.e. 90*3/5). so isnt this wrong theoretically?Not at all.
Firstly they can offer however many shares they want to. Whether the shareholders in B will accept the offer is up to them (and this what the question asks you to advise on).
Secondly, if they offered 55m shares it would mean that all the synergy gains would be given to the shareholders of B. If this were to be the case there would be no point in A acquiring B.
Absolutely clear! Your explanations are so succinct, yet so to the point! Thanks so much John sir!
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