Question Tag: Acquisition strategy

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  • 20 Marks

FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions

Advise on financial synergies from KP's acquisition of TE and evaluate cash vs. share-for-share offers.

You run a financial consultancy firm and have been approached by a new client for advice on a potential acquisition. Kola Plc (KP) is a large engineering company that was listed on the stock market ten years ago, with the founders retaining a 20% stake in the business. KP initially experienced rapid growth in earnings before tax, but soon after listing, competition intensified, leading to a significant decline in growth, which currently stands at 4%. Concerned about limited future growth opportunities, the board has decided to adopt a market development strategy for growth by acquiring companies in less competitive regions using KP’s significant cash reserves. The board has identified Temidayo Engineering (TE) as a potential acquisition target.

Temidayo Engineering (TE):

TE is a private engineering company established eight years ago, with early accumulated losses that have now turned profitable, achieving an 8% annual growth in earnings before tax. Cash reserves remain low, and capital access has been a constraint on TE’s investment potential. The founders and their families own 70% of the shares, while a venture capitalist holds the remaining 30%.

Acquisition Information:

KP’s board prefers that TE’s founders remain as directors post-acquisition and has sufficient cash reserves to purchase TE outright. A cash offer of ₦13.10 per share is considered likely to encourage TE’s shareholders to approve the acquisition. Alternatively, KP’s board is exploring a share-for-share exchange to preserve cash for future acquisitions and dividends. Recent mergers in the industry have attracted a 25-30% acquisition premium, with TE’s shareholders expecting a premium towards the higher end for a share-for-share offer. KP has asked you to design a share-for-share offer scheme with a 30% premium.

Extracts from the Latest Financial Statements:

Additional Financial Information:

  • KP has ₦0.50 ordinary shares totaling ₦7,500 million, with each share trading at ₦5.28. It is expected that KP’s price-to-earnings (P/E) ratio will increase by 10% if the acquisition proceeds.
  • TE upgraded its main manufacturing facility last year, expecting annual pre-tax cost savings of ₦50 million from the current financial year. TE has ₦0.25 ordinary shares totaling ₦700 million. TE’s P/E ratio is estimated to be 20% higher than KP’s current P/E ratio based on comparable company analysis.
  • KP’s CEO estimates annual pre-tax revenue and cost synergies of ₦304 million post-acquisition, while the finance director anticipates additional pre-tax financial synergies of ₦106 million, though cautiously, following reports that many acquisitions overestimate synergies. The tax rate is 20%.

Required:

a. Discuss possible sources of financial synergy arising from KP’s acquisition of TE. (6 Marks)

b. Advise the directors on a suitable share-for-share exchange offer that meets TE’s shareholders’ criteria and calculate the impact of both cash and share-for-share offers on the post-acquisition wealth of KP’s and TE’s shareholders. (14 Marks)

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  • 15 Marks

FM – May 2018 – L3 – SC – Q6 – Mergers and Acquisitions

Key factors for target selection and consideration form in acquisition decisions for Okpara Plc.

Okpara Plc. is a large publicly quoted company in the eastern part of Nigeria. It operates in the home appliances industry with significant market share. In a recent strategy meeting, the directors decided to pursue aggressive growth through mergers in other parts of the country and along the ECOWAS sub-region.

Required:

Prepare a report to the Board of Directors of Okpara Plc. to address the following matters:

a. Six factors to be considered when choosing a target for acquisition.
(9 Marks)

b. Four factors which a bidding company should take into account in deciding the form of consideration to be offered.
(6 Marks)

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  • 20 Marks

CSEG – May 2019 – L2 – Q5 – Strategic alternatives, analysis and selection

Analysis of strategic advantages and challenges of acquiring East Legon Executive Fitness Club compared to Azugu's organic growth model and recommendations for ensuring staff retention post-acquisition.

You are a Finance Manager who works in the Finance Team of Azugu Gyms (Azugu) and your role includes giving advice on strategic projects and financial matters. Azugu is a family-owned business established in 2009 by two brothers. The two brothers invested an initial sum of GH¢300,000, splitting the share capital 50/50, issuing a total of 100,000 shares in Azugu. Azugu was launched with the aim to make gym-based fitness training highly accessible by removing the obstacles to exercise and making its gyms affordable to most people, opening more gyms for accessibility, and providing optimum flexibility in offering non-contractual membership. Azugu is currently very popular in Ghana, and total membership and new gym openings have grown rapidly since 2009.

Azugu is considering moving away from their organic growth model and has been considering and looking for a potential acquisition. The East Legon Executive Fitness Club is for sale at what seems to be a low price. East Legon Executive Fitness Club has gained a reputation over the past few years for loyal customers and has been rated as ‘outstanding’ by 95% of its members in 2017. Although the East Legon Executive Fitness Club’s annual results are excellent, it doesn’t quite fit with the current operations of Azugu. It is a luxury gym group with highly priced membership and high levels of staff/customer interaction. However, its fitness equipment is out of date by the standards of Azugu. There are concerns that when Azugu acquires the East Legon Executive Fitness Club, most of their staff may leave. The staff have expressed concerns that when it acquires East Legon Executive Fitness Club, it may make it a budget gym and are worried about the security of their jobs.

Required:

a) Discuss THREE (3) strategic advantages and THREE (3) challenges of acquiring East Legon Executive Fitness Club compared with Azugu’s usual organic approach to growth within the country.
(12 marks)

b) Identify FOUR (4) ways to ensure that East Legon Executive Fitness Club staff remain reassured, motivated, and loyal throughout the acquisition process.
(8 marks)

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  • 20 Marks

FM – Nov 2023 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the potential acquisition of Akwaaba Films by Lekker Inc, including valuation, cost of equity, and reasons for potential merger failures.

Lekker Inc (Lekker) is a film company located in South Africa. The company is planning to expand into other African countries. The research department of Lekker recommends Ghana as a good location for establishing a subsidiary due to its abundant talent and political stability. However, the company is unsure whether to establish a completely new subsidiary or acquire an existing film company in Ghana. You have been engaged as a consultant to guide Lekker in taking this decision.

Your preliminary assessment revealed the following:

i) You have identified a Ghanaian filmmaker who owns a fast-growing film company called Akwaaba Films (Akwaaba). You observed that the Ghanaian filmmaker is likely to sell Akwaaba if Lekker could pay GH¢450,000 as purchase consideration. Akwaaba is entirely self-financed, with the owner receiving all profits as dividends. You forecast that Akwaaba’s profit after tax will grow at a rate of 6% per year for the first two years, 4% per year for the next two years, and thereafter, grow at a constant rate of 2% per year in perpetuity. The financial information extracted from Akwaaba shows the following:

Description GH¢
Revenue 250,000
Operating Cost (140,000)
Administrative cost (30,000)
Profit before tax 80,000
Tax @ 25% (20,000)
Profit after tax 60,000

ii) If Lekker decides to set up the subsidiary in Ghana by itself with the same GH¢450,000 purchase consideration for Akwaaba, its after-tax cash flows will be as follows:

Year Cash Flow (GH¢)
Year 1 15,000
Year 2 26,000
Year 3 35,000
Year 4 33,000

The overall Price/Earnings (P/E) ratio for the film industry in Ghana is 15 times. The average cash flow risk for unquoted companies in Ghana is 20%. Lekker does not intend to list on the Ghana Stock Exchange.

iii) Lekker’s cost of capital is 16%.

Required:
a) Enumerate THREE (3) advantages of expansion through acquisition over organic expansion to the owners of Lekker. (6 marks)
b) Compute the value of Akwaaba using the dividend valuation method and advise Lekker whether it should acquire Akwaaba at the purchase consideration of GH¢450,000. (8 marks)
c) Using the P/E ratio method, estimate the expected value of Lekker’s subsidiary in Ghana without the acquisition. (4 marks)
d) State TWO (2) reasons mergers and acquisitions may fail to achieve the expected outcomes. (2 marks)

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  • 20 Marks

FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions

Advise on financial synergies from KP's acquisition of TE and evaluate cash vs. share-for-share offers.

You run a financial consultancy firm and have been approached by a new client for advice on a potential acquisition. Kola Plc (KP) is a large engineering company that was listed on the stock market ten years ago, with the founders retaining a 20% stake in the business. KP initially experienced rapid growth in earnings before tax, but soon after listing, competition intensified, leading to a significant decline in growth, which currently stands at 4%. Concerned about limited future growth opportunities, the board has decided to adopt a market development strategy for growth by acquiring companies in less competitive regions using KP’s significant cash reserves. The board has identified Temidayo Engineering (TE) as a potential acquisition target.

Temidayo Engineering (TE):

TE is a private engineering company established eight years ago, with early accumulated losses that have now turned profitable, achieving an 8% annual growth in earnings before tax. Cash reserves remain low, and capital access has been a constraint on TE’s investment potential. The founders and their families own 70% of the shares, while a venture capitalist holds the remaining 30%.

Acquisition Information:

KP’s board prefers that TE’s founders remain as directors post-acquisition and has sufficient cash reserves to purchase TE outright. A cash offer of ₦13.10 per share is considered likely to encourage TE’s shareholders to approve the acquisition. Alternatively, KP’s board is exploring a share-for-share exchange to preserve cash for future acquisitions and dividends. Recent mergers in the industry have attracted a 25-30% acquisition premium, with TE’s shareholders expecting a premium towards the higher end for a share-for-share offer. KP has asked you to design a share-for-share offer scheme with a 30% premium.

Extracts from the Latest Financial Statements:

Additional Financial Information:

  • KP has ₦0.50 ordinary shares totaling ₦7,500 million, with each share trading at ₦5.28. It is expected that KP’s price-to-earnings (P/E) ratio will increase by 10% if the acquisition proceeds.
  • TE upgraded its main manufacturing facility last year, expecting annual pre-tax cost savings of ₦50 million from the current financial year. TE has ₦0.25 ordinary shares totaling ₦700 million. TE’s P/E ratio is estimated to be 20% higher than KP’s current P/E ratio based on comparable company analysis.
  • KP’s CEO estimates annual pre-tax revenue and cost synergies of ₦304 million post-acquisition, while the finance director anticipates additional pre-tax financial synergies of ₦106 million, though cautiously, following reports that many acquisitions overestimate synergies. The tax rate is 20%.

Required:

a. Discuss possible sources of financial synergy arising from KP’s acquisition of TE. (6 Marks)

b. Advise the directors on a suitable share-for-share exchange offer that meets TE’s shareholders’ criteria and calculate the impact of both cash and share-for-share offers on the post-acquisition wealth of KP’s and TE’s shareholders. (14 Marks)

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  • 15 Marks

FM – May 2018 – L3 – SC – Q6 – Mergers and Acquisitions

Key factors for target selection and consideration form in acquisition decisions for Okpara Plc.

Okpara Plc. is a large publicly quoted company in the eastern part of Nigeria. It operates in the home appliances industry with significant market share. In a recent strategy meeting, the directors decided to pursue aggressive growth through mergers in other parts of the country and along the ECOWAS sub-region.

Required:

Prepare a report to the Board of Directors of Okpara Plc. to address the following matters:

a. Six factors to be considered when choosing a target for acquisition.
(9 Marks)

b. Four factors which a bidding company should take into account in deciding the form of consideration to be offered.
(6 Marks)

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  • 20 Marks

CSEG – May 2019 – L2 – Q5 – Strategic alternatives, analysis and selection

Analysis of strategic advantages and challenges of acquiring East Legon Executive Fitness Club compared to Azugu's organic growth model and recommendations for ensuring staff retention post-acquisition.

You are a Finance Manager who works in the Finance Team of Azugu Gyms (Azugu) and your role includes giving advice on strategic projects and financial matters. Azugu is a family-owned business established in 2009 by two brothers. The two brothers invested an initial sum of GH¢300,000, splitting the share capital 50/50, issuing a total of 100,000 shares in Azugu. Azugu was launched with the aim to make gym-based fitness training highly accessible by removing the obstacles to exercise and making its gyms affordable to most people, opening more gyms for accessibility, and providing optimum flexibility in offering non-contractual membership. Azugu is currently very popular in Ghana, and total membership and new gym openings have grown rapidly since 2009.

Azugu is considering moving away from their organic growth model and has been considering and looking for a potential acquisition. The East Legon Executive Fitness Club is for sale at what seems to be a low price. East Legon Executive Fitness Club has gained a reputation over the past few years for loyal customers and has been rated as ‘outstanding’ by 95% of its members in 2017. Although the East Legon Executive Fitness Club’s annual results are excellent, it doesn’t quite fit with the current operations of Azugu. It is a luxury gym group with highly priced membership and high levels of staff/customer interaction. However, its fitness equipment is out of date by the standards of Azugu. There are concerns that when Azugu acquires the East Legon Executive Fitness Club, most of their staff may leave. The staff have expressed concerns that when it acquires East Legon Executive Fitness Club, it may make it a budget gym and are worried about the security of their jobs.

Required:

a) Discuss THREE (3) strategic advantages and THREE (3) challenges of acquiring East Legon Executive Fitness Club compared with Azugu’s usual organic approach to growth within the country.
(12 marks)

b) Identify FOUR (4) ways to ensure that East Legon Executive Fitness Club staff remain reassured, motivated, and loyal throughout the acquisition process.
(8 marks)

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  • 20 Marks

FM – Nov 2023 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the potential acquisition of Akwaaba Films by Lekker Inc, including valuation, cost of equity, and reasons for potential merger failures.

Lekker Inc (Lekker) is a film company located in South Africa. The company is planning to expand into other African countries. The research department of Lekker recommends Ghana as a good location for establishing a subsidiary due to its abundant talent and political stability. However, the company is unsure whether to establish a completely new subsidiary or acquire an existing film company in Ghana. You have been engaged as a consultant to guide Lekker in taking this decision.

Your preliminary assessment revealed the following:

i) You have identified a Ghanaian filmmaker who owns a fast-growing film company called Akwaaba Films (Akwaaba). You observed that the Ghanaian filmmaker is likely to sell Akwaaba if Lekker could pay GH¢450,000 as purchase consideration. Akwaaba is entirely self-financed, with the owner receiving all profits as dividends. You forecast that Akwaaba’s profit after tax will grow at a rate of 6% per year for the first two years, 4% per year for the next two years, and thereafter, grow at a constant rate of 2% per year in perpetuity. The financial information extracted from Akwaaba shows the following:

Description GH¢
Revenue 250,000
Operating Cost (140,000)
Administrative cost (30,000)
Profit before tax 80,000
Tax @ 25% (20,000)
Profit after tax 60,000

ii) If Lekker decides to set up the subsidiary in Ghana by itself with the same GH¢450,000 purchase consideration for Akwaaba, its after-tax cash flows will be as follows:

Year Cash Flow (GH¢)
Year 1 15,000
Year 2 26,000
Year 3 35,000
Year 4 33,000

The overall Price/Earnings (P/E) ratio for the film industry in Ghana is 15 times. The average cash flow risk for unquoted companies in Ghana is 20%. Lekker does not intend to list on the Ghana Stock Exchange.

iii) Lekker’s cost of capital is 16%.

Required:
a) Enumerate THREE (3) advantages of expansion through acquisition over organic expansion to the owners of Lekker. (6 marks)
b) Compute the value of Akwaaba using the dividend valuation method and advise Lekker whether it should acquire Akwaaba at the purchase consideration of GH¢450,000. (8 marks)
c) Using the P/E ratio method, estimate the expected value of Lekker’s subsidiary in Ghana without the acquisition. (4 marks)
d) State TWO (2) reasons mergers and acquisitions may fail to achieve the expected outcomes. (2 marks)

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