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Hi John,
Struggling a little with dividing up the gain/value created on combination between acquiring companies’ shareholders & the acquired companies’ shareholders.
Best demonstrated when comparing 2 exam questions Selorne (06/08) and Makonis (12/13).
In Selorne, the value created on combination is calculated as $35.7m. The share of this attributed to the acquired company shareholders is calculated as (#shares in combined org x share price of combined org) i.e. 10m x $7.01 = $70.1m received LESS the value of the acquired org ($60.1m per future FCFE discounted) EQUALS their share of value created of $10m. This leaves the o/s share of value created (35.7 – 10) 25.7m attributed to shareholders of acquiring company.
In Makonis, the value created on combination is $503.94m. The combined org value is 2,201.94 , there are 310m shares, meaning share price of combined org is $7.1 per share. If we follow the same logic applied in Selorne above, the value received by the acquired shareholders would be 100m shares x $7.1 = $710m. Market Cap of the acquired org is 480m, so their share of value created would be $230m. However, the question states the acquiring org is buying at a “Premium of 30%” by way of “one-for-two” share exchange plus cash. This means the value received by the acquired company is Current Value + 30% i.e. Market Cap 480M x 1.3 = 624M value received. The question then uses this as the basis to calculate the share of the value created attributed to the acquired companies shareholders (i.e. 624 received less 480 fair value = 144M , quite different to the 230m calculated on other basis). – i.e. when valuing the share/apportionment of the value created attributable to shareholders of the acquired org, this question does not seem to consider the value of the shares in the now combined org received by the acquired shareholders, like the Serlorne q did. Why is this?
Many thanks – sorry if long q,
It depends from which point of view we are looking.
As far as the acquiring company are concerned, the company will know what the likely future share price of the combined company will be, and will use that to decide what they can afford to pay and what gain will be made.
As far as shareholders in the target company are concerned, then will not know the likely future price of the combined company and will therefore be looking at the existing share price of the acquiring company.
If it is not clear in the question as to which point of view to take (and it isn’t always immediately obvious), then (as always in Paper AFM) state your assumption and you will still get the marks 🙂
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