The following information is available Aba Ltd Oca Ltd Market price per share

The following information is available aba ltd oca

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The following information is available: Aba (Ltd) Oca (Ltd) Market price per share R10.00 R8.00 Earnings per share R3.00 R2.40 No. of shares issued 2 million 1 million Cash payment to Oca Ltd = R12 million. Synergistic benefits of R10 million will accrue through the acquisition. [243]
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Required: Assume the acquisition is based on market values with a cash payment : 1.1. Calculate the combined value of the proposed acquisition. (2) 1.2. Determine the net present value of the proposal. (2) 1.3. Calculate the acquisition premium. (2) 1.4. Calculate the post-acquisition market price of the share. (3) 1.5. Determine the post-acquisition increase/decrease price of the share. (2) Assume the acquisition is based on earnings per share: 1.6. Determine the exchange ratio based on earnings per share. (2) 1.7. Compute the total number of shares in the proposed acquisition. (3) 1.8. Calculate the post-acquisition earnings per share. (4) 1.9. Calculate the benefits, if any, to the two parties. (5) SOLUTION/WORKINGS/CALCULATIONS Assume the acquisition is based on market values with a cash payment : [244]
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1.1. Calculate the combined value of the proposed acquisition. Combined Value of Acquisition = No. of shares issued X Market price per share (Aba) + No. of shares issued X Market price per share (Oca) + Synergy = MV(Aba) + MV(Oca) + Synergy = 2m X R10 + 1m X R8 + R10m = R20m + (R8m + R10m) = R38million 1.2. Determine the net present value of the proposal. Present value of the Proposed acquisition = Incoming Value - Outgoing payment (for Target) = (MV(Oca) + Synergy ) – Cash payment to Oca = 1million X R8 + R10million - R12million =R18million - R12million = R6 million [245]
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1.3. Calculate the acquisition premium. Takeover Premium (to the Target) = Amount paid - MV of TC = R12 m – R8m = R4 million 1.4. Calculate the post-acquisition market price of the share. REMEMBER CASH PAYMENT (NO SHARES WERE ISSUED FOR THE TARGET!!!!) Post-acquisition Market Price per share ¿ COMBINED MARKET VALUE TOTAL NUMBEROF SHARES COMBINED MARKET VALUE = R38million (see 1.1, above) – R12 million = R26 million TOTAL NUMBER OF SHARES (POST-ACQUISITION): 2 million Therefore, Post-acquisition Market Price ¿ COMBINED MARKET VALUE TOTAL NUMBEROF SHARES = R 26 m 2 m ≈R 13.00 1.5. Determine the post-acquisition increase/decrease price of the share. Change = Post-acquisition Market Price - Pre-acquisition Market Price (Aba) = R13.00 - R10.00 = R3.00 (increase) [246]
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Assume the acquisition is based on earnings per share: 1.6. Determine the exchange ratio based on earnings per share. Exchange Ratio ¿ EPS ( Target ) EPS ( Acquirer ) = EPS ( Oca ) EPS ( Aba ) = R 2.40 R 3.00 = 0.8 1.7. Compute the total number of shares in the proposed acquisition. WE ASSUME THAT OCA SHARES WERE EXCHANGED FOR ABA’s SHARES!!!! Total No. of shares = No. of Shares of Acquirer + No. of Shares of Target X Exchange ratio = 2 million + 1 million X 0.8 = 2.8 million 1.8. Calculate the post-acquisition earnings per share. Combined Earnings of Acquisition = No. of shares issued X Earnings per share (Aba) + No. of shares issued X Earnings per share (Oca) + Synergy = MV(Aba) + MV(Oca) + Synergy = 2m X R3.00 + 1m X R2.40 + R10m = R6m + (R2.4m + R10m) = R18.4 million [247]
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Total Number of Shares = 2.8 million Therefore, post-acquisition EPS ¿ Combined Value after payment
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