mergers and aqcisitions

MERGERS AND ACQUISITIONS

MERGERS

Personal 1a (i ) if S . plc and A . plc decide to merge where shares of A will be issues for exchange of shares of S using the current market prices and price earning ratio of 8 it will have a number of effects . The effects on the value of their shares for each alternative will be as follows

Valuation using current market prices

If the current market prices are used , the formula will be number of shares X the market value

The value of S . plc

shares will be 1 ,064 ,000 x 1 .03 ?1 ,095 ,920

The value of A . plc shares will be 800 ,000 X 2 .40 ?1 ,920 ,000

If the market prices are used in issuing the prices , shareholders of S plc limited will be issued with 456633 shares of A . and this will be arrived using the following formula

Number of shares of S x market price of S 1064000 x 1 .03 456633

Market price of A 2 .4

The Earnings per share will be ?404 ,000 32p per share after the merger (800 ,000 456 ,633

After the merger earning per share will be higher than both firms has before because the number of shares issued in exchange for the shares of S were too little because of the market prices difference . This is why the earning per share after the merger has gone up and it is shown as calculated above

Therefore it goes that whenever there is use of market price win valuing the share then the earnings per share of the acquiring firm will be greater and the effective earnings for both original holders ' increases The long term effect will depend on the growth rate of the two companies and in this case we are not given the growth rate of the company therefore it is not easy to state the long term effect in merging these two companies . However the short term effect has been explained . The market price per share or the valuation of the company will also be affected as follows

Market price will be equal to ?2 .4

Earning per share will be equal to 32p per share

This is temporary because the price will be determined by the market forces . The assumption here is since the market price has been used in valuation , it will remain constant and the rest will remain to be adjusted by the market forces due to delusion of ownership , changes in financial and managerial decisions , changes in expected earnings and changes in business and financial risk

Using the market price ratio the effect will be seen and the market price ratio is calculated as follows

Earnings available for common stock ?404000

Number of outstanding shares 1256633

Earnings per shares 32p

Market price per share ?2 .4

The value of the company after the merger will be ?2 .4 X 1 ,256 ,633 3 ,015 ,919

The valuation remains constant as at before merger that...