- 20 Marks
FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions
This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.
Question
Olongon Plc (Olongon) and Kwatrikwa Plc (Kwatrikwa) are competitors listed on the Ghana Stock Exchange. Due to poor managerial decisions, Kwatrikwa’s earning power has been uncertain in recent years, making shareholders contemplate selling the business. However, the management of Kwatrikwa has used various defensive tactics to block any takeover they perceive to be hostile. In the just-ended Annual General Meeting (AGM), Kwatrikwa’s shareholders resolved to sell the company. Shareholders of Olongon have expressed interest in acquiring Kwatrikwa and have suggested to the board to put a proposal together for consideration in the next extraordinary meeting. Olongon’s board has gathered the information below to guide the drafting of the proposal:
| Company | Olongon | Kwatrikwa |
|---|---|---|
| Earnings per share (GH¢) | 0.50 | 0.50 |
| Retention ratio | 0.60 | 0.40 |
| Price per share (GH¢) | 10.00 | 5.00 |
| Number of shares | 25,000 | 25,000 |
Required:
a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)
b) Assuming the share price of the combined business after the acquisition is the same as the share price of Olongon, calculate the market value, earnings per share, and the Price/Earnings ratio of the combined business.
(6 marks)
c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)
d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Defensive Tactics, Earnings Per Share, Market Value, Share Exchange
- Level: Level 2
- Topic: Mergers and acquisitions
- Series: MAR 2024