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Dear Sir,
When calculating the percentage gain to the shareholders of the victim company in case of a share-for-share exchange, don’t we use the expected share price of the combined company?
In one of the asnwers Kaplan uses the current share price of the acquiring company, I think it is not correct.Please help.
It depends really from who’s point of view we are looking.
If we are looking at what the acquiring company can afford to give then we should look at the expected share price after the acquisition.
However, if we are looking at what the shareholders of the company being acquired expect to get, they do not have the information needed in order to estimate the new share price, and are more likely to base their views on the current share price of the acquirer.
Ok, but which one to use during the exam, if the requirement says simply calculate the percantage gain to the shareholders of the victim company?
It is not always clear. In the case you have typed then I would base it on the current share price of the acquirer if there were no other information. However as always the main thing is to state your assumptions 🙂
So even if the information is provided for the calculation of the expected share price, I can use the current share price stating the assumption that the shareholders of the acquired company are unlikely to have that information and get full marks?
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