Question Tag: Gain Calculation

a) Mergers and acquisitions are business strategies used to achieve various synergies. However, it is observed that there are instances where the desired results are not achieved after the mergers and acquisitions have taken place.

Required:
Explain THREE (3) reasons why mergers and acquisitions fail to achieve the desired results. (6 marks)

b) Mako Ghana Ltd is a company in Ghana operating in the Manufacturing industry and currently valued at GH¢200 million. Jini Ltd is also operating in the same industry but on a smaller scale and is currently valued at GH¢80 million. Due to growing challenging operating environment currently, the shareholders of both companies agreed to a 100% equity acquisition of Jini Ltd by Mako Ghana Ltd.

A detailed research and analysis by the Finance team of Mako Ghana Ltd shows the following:

• There will be incremental operation cost of GH¢40 million per annum in perpetuity due to the increased number of branches.
• The combined company’s market share will improve by 15% per annum on the average leading to incremental revenue of GH¢160 million per annum in perpetuity.

Based on the analysis above, both parties agreed to seal the deal under the following payment terms:

Option One:
Mako Ghana Ltd to pay GH¢170 million in cash for the 100% equity of Jini Ltd.

Option Two:
Mako Ghana Ltd to offer 25% of the combined company’s equity to shareholders of Jini Ltd as the payment for the 100% equity.

The cost of capital of Mako Ghana Ltd is 15% per annum.

Required:
i) Calculate the gains from the acquisition for Mako Ghana Ltd. (4 marks)
ii) Calculate the cost of the acquisition to Mako if cash is paid under Option one. (4 marks)
iii) Calculate the cost of the acquisition to Mako Ghana Ltd if the 25% of the combined equity is used for the payment under option two. (6 marks)