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EFN412_Topic_08_Reading_and_Tutorial_Guide - 1 School of...

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1 School of Economics and Finance, QUT EFN412 Advanced Managerial Finance Reading and Tutorial Guide Topic 08 Takeovers Reading: PBEHP, 10 th edition, Chapter 19, Read and study all parts. PBEHP, 9 th edition, Chapter 20, Read and study all parts. Do Self-Test Problems 1 and 2 in PBEHP 10 th edition p661. The solutions are at the back of the text on page 800. Alternatively, do Self-Test Problems 1 and 2 in PBEHP 9 th edition p676. The solutions are at the back of the text on page 832. Spreadsheet: Takeover PE Magic.xls. See QUT Blackboard site. Also read lightly the PDF file containing paper clippings of the Campbells Arnotts takeover. This is an old case of a takeover, but still contains some very relevant material on takeovers. Campbells was originally called in as a “White Knight” to assist Arnotts fend off a takeover. Eventually Campbells turned into a “Black Knight” and took over Arnotts. The file is on the QUT Blackboard site. Theme of Lecture: Takeovers Definitions: Mergers, Takeovers, Acquisitions, Buyouts Classification of Takeovers Reasons for Takeover Activity Legal Process of Takeovers Takeover Defences Empirical Evidence on Costs & Benefits of Takeovers Synergy Company Valuation for Takeovers Beware the EPS bootstrap game Learning Objectives: On completing this topic students should: Be able to define and classify takeovers and mergers Be able to evaluate suggested reasons for takeovers Understand the basic legal framework of takeovers List and define the various takeover defences Understand the concept of synergy Be able to evaluate a takeover Review the empirical evidence Be aware of the trap in the EPS bootstrap game
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2 Takeover Example: Alpha Ltd is considering the acquisition of Omega Ltd. Both companies are wholly equity financed and each has two million shares on issue. The annual net cash flows of Alpha and Omega are $1million and $0.5 million respectively and these cash flows are expected to remain constant in perpetuity. Alpha shareholders require a rate of return of 20% per annum. Alpha has a beta of 1, but Omega’s operations are of higher risk and its beta is 1.5. After the takeover, Omega’s net cash flow is expected to increase to $750,000 per annum in perpetuity with no change in risk. The risk free rate is 10%. a) Calculate the price per share at which Omega represents a zero net present value investment to Alpha. b) Alpha offers $2.6 million cash for 100% of Omega. Calculate the effect of the takeover on the wealth of each company’s shareholders. c) Alpha makes an offer to swap 1 Alpha shares for 2 of Omega shares. Calculate the share prices for both companies after the takeover assuming that the offer is accepted. Part (a) Omega’s required return is given by substituting into the CAPM.
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