Based on an extensive due diligence investigation it

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companies amount to R2 500 000 and R1 000 000 respectively. Based on an extensive due diligence investigation, it was determined that substantial operating synergies could be achieved by integrative operations. The management of BidorDie also considers that current management of Smallfry to be inefficient. Based on their valuation they consider Smallfry’s ordinary shares to be undervalued and estimate a final value that is 10% higher than current market capitalisation. BidorDie and Smallfry have 100 000 and 20 000 shares respectively. Based on this information, the exchange ratio can be estimated as follows: Exchange Ratio = (1 00 000 x 1.10) / 20 000 = 2.20 2 500 000 / 100 000 This exchange ratio indicates that Smallfry’s shareholders should receive 2.2 shares in BidorDie in exchange for each existing share they hold. In order to finance the merger transaction, BidorDie therefore needs to issue 44 000 shares (2.2 x 20 000) and distribute these to shareholders of Smallfry.
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- Factors that contribute to the vulnerability to becoming a takeover target include : Inefficient Management / Poor Corporate Governance By replacing the management an acquiring company can increase the value of the firm and earn a return on their investment Well Managed Companies Another theory is that well managed companies are attractive for acquisition because of association A low Q-Ratio (share price to asset replacement cost) A highly liquid balance sheet A good cash flow to share price ratio A low P/E ratio The existence of non-essential subsidiaries that can be sold without significantly impairing the company’s cash flow A small percentage of shares owned by the incumbent management - Most defense mechanisms are of a financial nature, other involve restructuring ownership and organisational structure - Practical Examples of Defense Mechanisms: Increase debt to an unacceptable level Repurchase shares in open market to reduce shares available for the acquiring company Repurchase shares to decrease their cash Liquidate securities portfolio Spin-off non-essential subsidiaries and undervalued assets Restructure bond covenants forces accelerated debt repayment in event of takeover Engage in dual class recapitalisation Engage in LBO’s and MBO’s to make the firm private Restructure employee ownership plans Sell the crown jewels sell assets the acquirer wants - very extreme and often causes failure Engage in joint ventures to inconvenience bidder extend senior managers employment contracts golden parachutes engage in “greenmail repurchase a large block of shares from shareholders at a premium engage in the PacMan defense make a counter offer (offer to buy the company bidding on them) Seek a white knight - find a company to displace the unwanted bidder - rescuer takes majority interest in the target Seek a white squire – similar to a white knight but only takes a small stake in the target company Create a poison pill create securities designed to make the acquisition prohibitively expensive when a trigger point is reached - similar to options Conclusion - Different deal structures are available, and specific deal structures may be more appropriate for different M&A transactions - Business combinations can be structured by means of cash transactions, share transactions, assuming the debt of the company or a combination of these - A cash transaction entails the shares/assets of the target company being purchased for cash - Share transactions consist of exchanging target company’s shares for new shares in acquiring company or newly formed entity - Defense mechanisms could be employed to ward off hostile acquisitions from another company 6 | P a g e
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  • Fall '19
  • cash transactions

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