My question "Free lecture on share-for-share exchange calculation?"

Hello John, Similarly I am not quite clear how you calculated Kerrin's new value of its shares of 4041.2? Thanks a lot! Margarita

Hello John again, And why can we not just calculate as follows: 1) Total market value of Kerrin 2) Total market value of Danton 3) Combined market value including 20.5m USD synergies 4) Total number of shares in the combined company 5) New share price of the combined company (result from 3) divided by result from 4)) 6) New share price from 5) divided by Danton's share price to find out how many share Danton's shareholders should be given I am not getting the same result as you though, so I guess this approach is not correct? I am completely confused with share for share exchange, very sorry. Thank you so much!

We can't simply add the current MV's because the PE ratio changes. Also, the 20.5M synergy is an annual pre-tax increase int he earnings. So we need to calculate what the total combined earnings will be after the merger and multiply by the new PE ratio in order to get the total market value. We do not know how many shares there will be in the combined company until we know how many new shares are being issued. The question says that Danton are to be offered a 30% premium if it is a share for share exchange, and therefore given that the value of Danton's shares before the acquisition is 1,477.3, if you add on a premium of 30% they are to be given shares in Kerrin worth 1,920.5. The value of the combined company is 5,961.7 and therefore if Danton's shareholders are getting new shares worth 1,920.5 then the value of the existing shares in Kerrin must be the remaining 4,041.2. We know how many existing shares there are in Kerrin (750m) and so the new MV per share in Kerrin must be 4,041.2/750 = $5.388 So for shareholder in Danton to be given $13.71 per share, they need to be given 13.72/5.39 = 2.55 shares in Kerrin for every 1 share they held in Danton (approximately, because of roundings). Leaving it as this would be quite enough for the exam and would get full marks. It is nicer (but not necessary) not to have decimals in the share offer, and 18 shares for every 7 is the same (apart of roundings (18/7 = 2.57 shares for every 1 shares). But again, leaving it as 2.55 shares for every 1 shares is perfectly OK for the marks :-)

Dear John, Thank you so much for your detailed response, I really appreciate it! Just a short question: How do we know the value of the combined company of 5,961.7 to be able to calculate the value of Kerrin of 4,041.2? Thanks, Margarita

We multiply the new combined earnings (including the synergy benefit) by the new PE ratio.

Ok, thanks a lot. The combined P/E ratio is calculated by Kerrin's P/E ratio x 1.1 (increase of P/E ratio by 10% if the acquisition proceeds). How do we calculate the combined P/E ratio if no increase or change in P/E ratio is mentioned if the acquisition proceeds? Would it simply be the P/E ratio of the acquirer? Thanks again for your great help! Best regards, Margarita

If it is a PE approach then you would be told about the new PE ratio.

Ok, thank you so much for your help, John! Best regards, Margarita

You are welcome :-)