Cost savings – NBC Institute

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.

Question

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)

Answer

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Tags: Acquisition strategy, Cash Reserves, Cost savings, Financial Synergies, Price-Earnings ratio, Revenue Synergies, Share-for-Share Exchange, Wealth Impact
Level: Level 3

Topic: Mergers and acquisitions

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

Question

When five years ago the present regional divisional structure of Greater Accra, Ashanti, and Eastern was formalized, an attempt was made to ensure that common systems and ways of working were adopted across each of the three regions. However, due to the pressures on the Company, this was never fully implemented.

Required:
Explain the potential benefits of resource sharing (configuring an organization’s computing system in such a way that the information and resources within it can be accessed, and remotely accessed, across multiple administrative domains) to Prestige if they adopt common IT systems.

Answer

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Tags: Cost savings, IT Systems, remote access, resource sharing
Level: Level 3

Topic: Functional strategies
Series: MAR 2024

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

Question

c) Drake Limited is a Ghanaian-registered multinational company with FIVE subsidiaries in Europe, Asia, and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
Acting as Group Head of Finance for Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries, explaining the potential benefits of treasury centralization. (5 marks)

Answer

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Tags: Centralization, Cost savings, Financial risk, multinational companies, Treasury Management
Level: Level 3

Topic: The role of the treasury function in multinationals
Series: MAY 2016

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

Question

Hukportie Ltd is a manufacturer of product “Okwada” which is sold for GH¢5 per unit. Variable costs of production are currently GH¢3 per unit, and fixed costs excluding depreciation is GH¢350,000. The current machine which was purchased for GH¢120,000 has a written down value of GH¢20,000 and a resale value of GH¢12,000. This can however be used for the next four years.

A new machine is available which would cost GH¢90,000. This could be used to make product “Okwada” for a variable cost of only GH¢2.50 per unit. Fixed costs, however, would increase by GH¢7,500 per annum as a direct consequence of purchasing the machine. The machine would have an expected life of 4 years and a resale value after that time of GH¢8,000. Sales of product Okwada are estimated to be 75,000 units per annum.

Hukportie limited expects to earn at least 12% per annum from its investments. Taxation and depreciation should be ignored.

Required:

Advise whether Hukportie Ltd should purchase the new machine. (10 marks)

Answer

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Tags: Capital Budgeting, Cost savings, Decision Making, machinery, Net Present Value
Level: Level 2

Topic: Decision making techniques
Series: MAY 2019

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

Question

Amanfi Ltd manufactures cooking oil for the local markets in Ghana. The management of Amanfi Ltd believes that by merging with one of their input suppliers, Aseebu Ltd, the company will be able to control supply, thus giving the Amanfi Group a low-price advantage in the market. Aseebu Ltd is a key supplier of inputs to companies in the cooking oil industry. The financial statements of the two companies are shown below:

Income Statement for the past Five Years (Amanfi Ltd)

Year (Million GH¢)	2018	2019	2020	2021	2022 (current year)
Sales	3,720	4,092	4,500	4,950	5,442
Cost of Sales	(1,674)	(1,841)	(2,025)	(2,228)	(2,449)
Operating Profit	2,046	2,251	2,475	2,722	2,993
Finance Cost	(252)	(278)	(305)	(336)	(369)
Earnings Before Tax	1,794	1,973	2,170	2,386	2,624
Tax @ 30%	(538)	(592)	(651)	(716)	(787)
Earnings After Tax	1,256	1,381	1,519	1,670	1,837

Income Statement for the past Five Years (Aseebu Ltd)

Year (Million GH¢)	2018	2019	2020	2021	2022 (current year)
Sales	1,860	2,046	2,250	2,475	2,496
Cost of Sales	(837)	(921)	(1,013)	(1,114)	(1,123)
Operating Profit	1,023	1,125	1,237	1,361	1,373
Finance Cost	(126)	(139)	(153)	(168)	(169)
Earnings Before Tax	897	986	1,084	1,193	1,204
Tax @ 30%	(269)	(296)	(325)	(358)	(361)
Earnings After Tax	628	690	759	835	843

Additional Information:
Amanfi Ltd and Aseebu Ltd have beta of 1.6 and 1.1 respectively. The government treasury bill rate pays a yield of 8% and risk premium on the market is 17%. If the merger goes through, the combined company’s earnings after tax will grow at the same rate as Amanfi Ltd. The merger will lead to annual cost savings of GH¢850 million in perpetuity.

Required:
a) As a Finance Manager, calculate the value of the combined business based on the present value of expected earnings. (8 marks)
b) What is the maximum amount that Amanfi Ltd should pay for Aseebu Ltd? (4 marks)
c) What is the minimum bid that Aseebu Ltd shareholders should be prepared to accept? (4 marks)
d) Calculate the gain/loss from the merger. (2 marks)
e) Identify and explain the type of merger between Amanfi Ltd and Aseebu Ltd. (2 marks)

Answer

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Tags: Business Valuation, Cost savings, Earnings valuation, Mergers, Shareholder Value
Level: Level 2

Topic: Mergers and acquisitions
Series: JULY 2023

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.

Question

Temidayo Engineering (TE):

Acquisition Information:

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition strategy, Cash Reserves, Cost savings, Financial Synergies, Price-Earnings ratio, Revenue Synergies, Share-for-Share Exchange, Wealth Impact
Level: Level 3

Topic: Mergers and acquisitions

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost savings, IT Systems, remote access, resource sharing
Level: Level 3

Topic: Functional strategies
Series: MAR 2024

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

Question

Answer

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Tags: Centralization, Cost savings, Financial risk, multinational companies, Treasury Management
Level: Level 3

Topic: The role of the treasury function in multinationals
Series: MAY 2016

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

Question

Hukportie limited expects to earn at least 12% per annum from its investments. Taxation and depreciation should be ignored.

Required:

Advise whether Hukportie Ltd should purchase the new machine. (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Cost savings, Decision Making, machinery, Net Present Value
Level: Level 2

Topic: Decision making techniques
Series: MAY 2019

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

Question

Income Statement for the past Five Years (Amanfi Ltd)

Year (Million GH¢)	2018	2019	2020	2021	2022 (current year)
Sales	3,720	4,092	4,500	4,950	5,442
Cost of Sales	(1,674)	(1,841)	(2,025)	(2,228)	(2,449)
Operating Profit	2,046	2,251	2,475	2,722	2,993
Finance Cost	(252)	(278)	(305)	(336)	(369)
Earnings Before Tax	1,794	1,973	2,170	2,386	2,624
Tax @ 30%	(538)	(592)	(651)	(716)	(787)
Earnings After Tax	1,256	1,381	1,519	1,670	1,837

Income Statement for the past Five Years (Aseebu Ltd)

Year (Million GH¢)	2018	2019	2020	2021	2022 (current year)
Sales	1,860	2,046	2,250	2,475	2,496
Cost of Sales	(837)	(921)	(1,013)	(1,114)	(1,123)
Operating Profit	1,023	1,125	1,237	1,361	1,373
Finance Cost	(126)	(139)	(153)	(168)	(169)
Earnings Before Tax	897	986	1,084	1,193	1,204
Tax @ 30%	(269)	(296)	(325)	(358)	(361)
Earnings After Tax	628	690	759	835	843

Answer

Find Related Questions by Tags, levels, etc.

Tags: Business Valuation, Cost savings, Earnings valuation, Mergers, Shareholder Value
Level: Level 2

Topic: Mergers and acquisitions
Series: JULY 2023

Question Tag: Cost savings

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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.

Temidayo Engineering (TE):

Acquisition Information:

Additional Financial Information:

Required:

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

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.

Temidayo Engineering (TE):

Acquisition Information:

Additional Financial Information:

Required:

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

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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.

Temidayo Engineering (TE):

Acquisition Information:

Additional Financial Information:

Required:

You're reporting an error for "FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions"

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

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AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

You're reporting an error for "AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals"

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

You're reporting an error for "MA – May 2019 – L2 – Q1a – Decision making techniques"

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

You're reporting an error for "FM – July 2023 – L2 – Q2 – Mergers and acquisitions"

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.

Temidayo Engineering (TE):

Acquisition Information:

Additional Financial Information:

Required:

You're reporting an error for "FM – Nov 2021 – L3 – Q2 – Mergers and Acquisitions"

SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

You're reporting an error for "SCS – MAR 2024 – L3 – Q3 – Functional strategies"

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

You're reporting an error for "AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals"

MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

You're reporting an error for "MA – May 2019 – L2 – Q1a – Decision making techniques"

FM – July 2023 – L2 – Q2 – Mergers and acquisitions

Calculate the value of a combined business after a merger, determine the maximum and minimum acceptable prices for the merger, and evaluate the type of merger.

You're reporting an error for "FM – July 2023 – L2 – Q2 – Mergers and acquisitions"

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