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Hi John, I have a question about how to calculate the percentage gain for a target company when acquiring using a mixed offer.
For 2018DecQ1, the percentage gain for Tai Co is calculated as [(cash price + combined company) – Tai Co share price preacquisition]/ Tai Co share price pre-acquisition = (2.09+2.6-3.8)/3.8=23%
However, for 2013JuneQ2, the percentage gain for Strand Co is calculated as [(cash price + parent share price) – Strand Co share price preacquisition]/ Strand Co share price pre-acquisition = (1.33+9.24/2-4.76)/4.76= ($5·95 – $4·76)/$4·76 x 100% = 25·0%I am wondering why in the case of Tai Co, the suggested answer calculates the consideration as cash price + combined company. Still, in the case of Strand Co, the consideration is calculated as cash price + parent share price.
If I calculate Strand Co’s consideration using (cash price + combined company), which is the way used for Tai Co, it results in a different answer.
Here is what I did:
Combined company share number = 2400 + 600 share exchange = 3000
Combined company value = 29603 – 1.33*1200 cash paid = 28007
Combined company share price = 9.33
Percentage gain = [(cash price + combined company share price) – Strand Co share price preacquisition]/ Strand Co share price pre-acquisition = (1.33+9.33/2-4.76)/4.76 = 25.9%It produces a different answer, 25.9% versus 25%.
As both questions compute percentage gain in a different way, I wonder how we should calculate the percentage gain, would it be as [(cash price + parent share price) – share price preacquisition]/ share price pre-acquisition; or would it be [(cash price + combined company) –share price preacquisition]/ share price pre-acquisition?
Many thanks!
It all depends from whose point of view it is being looked at.
The shareholders of the company being acquired will not have the information as to the future flows to the combined company and therefore the future share prices, so they will be deciding on how ‘good’ the offer is based on the pre-acquisition share price.
On the other hand, the acquiring company does have the information enabling them to estimate the effect on the combined company share price and will use this to calculate what premium is effectively being offered.
As always, if it is not completely clear then state your assumption, so even if you have made the wrong assumption you will still get some credit even if you have made the wrong assumption.
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