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The condition set by Propleis Co’s shareholders would not be fulfilled if the value of the merged company was lower by more than ($141m – $124m)/0·75 = $23m of the total valuation, suggesting the need for sensitivity analysis of the figures or analysis of scenarios with detailed assumptions.
Can you please explain this calculation they did to determine how much the value should fall by if they are not to get the premium they wanted of 20%?
The premium they wanted was 20% of their equity value which is $124, so should it not be that if the combined company value fall by $124 million they would not get the premium they wanted, why is it $23 million?
“No indication is given of the reason for the choice of cost of capital of 10%. If the 10% is the weighted average cost of capital, that assumes that there will be no change in the finance and business risks and the same capital structure will be maintained, which requires confirmation”
Please also explain this, is it that no information is given on the cost of capital whether it is of Propleis Co or Adictcan Co or is the cost of capital of combined company, and that if Propleis Co cost of capital pre-acquisition is being used then it is assumed there is no change in financial and business risk and same capital structure will be maintained, it needs to be assessed that this will be the case after acquisition.
The synergy benefit going to Proplei is 141M. For it to be 124M it would need to be lower by 141 – 124 = 17M. Given that the equity is 75%, the total value of the company would need to fall by 17/0.75 = 23M.
What you have written regarding the cost of capital of 10% is correct.
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