- 10 Marks
FM – Nov 2019 – L2 – Q2b – Mergers and acquisitions
Determine the extent to which Powell's shareholders will benefit from the proposed merger.
Question
Global companies continuously explore ways to be more efficient and effective to survive the challenging global competition. Some resort to mergers and acquisitions to survive. In the light of this, Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:
| Carsley Ltd | Powell Ltd | |
|---|---|---|
| Number of shares | 40m | 10m |
| Annual earnings | GH¢10m | GH¢5.8m |
| P/E ratio | 8 | 10 |
Post-merger annual earnings of the enlarged company are expected to be eight percent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac Plc.
Required:
Determine the extent to which the shareholders of Powell will benefit from the proposed merger. (10 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Merger Benefits, Post-Merger Analysis, Shareholder Value
- Level: Level 2
- Topic: Mergers and acquisitions
- Series: NOV 2019