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(c) Approach taken
The maximum premium payable is equal to the maximum additional benefit created from the acquisition of Tori Co, with no increase in value for the shareholders of Vogel Co. It should be noted that the shareholders of Vogel Co would probably not approve of the acquisition if they do not gain from it, but certainly they would not approve a bid in excess of this.1.Question ) with no increase in value for the shareholders of Vogel Co??? What does it mean with that part? why did they mention that part in the model answer?
Assumptions
Based on the calculations given above, it is estimated that the value created will be 64.9% or $285.80m.
2.Question ) how could they produce 64.9%?
Thank you very much.
After the takeover there is an overall gain because the total value of the two companies together is greater than the total of the two companies separately (because of synergy).
Some of that gain goes to existing shareholders in Vogel and some of it goes to those who used to own shares in Tori. How the gain is shared depends on how much is paid to Tori shareholders – the more gain going to Tori shareholders then the less gain to Vogel shareholders (and vice versa). Shareholders in Vogel will only be happy allowing the takeover provided they get at least some of that gain. In theory they would be OK with no gain provided they did not lose money, but in practice why should they allow it if they were to make no gain at all – there would be no point 🙂
I really don’t know how the examiner arrived at 64.9%.
However a % was not asked for, and (if you look at the marking scheme) there were no marks for the %. All that is relevant is the 285.8m ?
I think it was a typing mistake and that is why when BPP have reprinted the examiners answer in their revision kit, they have deleted the 64.9% completely from that sentence.
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