- 20 Marks
FM – Nov 2020 – L3 – Q2 – Mergers and Acquisitions
Evaluates the acquisition impact of Yekin plc by Peter John plc, focusing on P/E ratio, EPS, market value, and strategic implications of a hostile takeover versus organic growth.
Question
Peter John plc (PJP) is considering a takeover bid for Yekin plc (YP).
PJP’s board of directors has issued the following statement:
“Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies.”
Summarized financial data for the companies (N Million):
| PJP | YP | |
|---|---|---|
| Sales | 480.0 | 353.0 |
| Profit before tax | 63.0 | 41.0 |
| Tax | (18.9) | (12.3) |
| Profit after tax | 44.1 | 28.7 |
| Dividends | 20.0 | 11.0 |
| Non-current assets (net) | 284.0 | 265.0 |
| Current assets | 226.4 | 173.0 |
| Total assets | 510.4 | 438.0 |
Equity and Liabilities:
| PJP | YP | |
|---|---|---|
| Ordinary shares (10 kobo par value) | 40.0 | 30.0 |
| Reserves | 211.2 | 192.0 |
| Medium and long-term borrowing | 86.0 | 114.0 |
| Current liabilities | 173.2 | 102.0 |
| Total | 510.4 | 438.0 |
Notes:
- After-tax savings in cash operating costs of N7,500,000 per year indefinitely are expected as a result of the acquisition.
- Initial redundancy costs will be ₦10 million before tax.
- PJP’s cost of capital is 12%.
- Current share prices: PJP = N29, YP = N18.
- The proposed terms of the takeover are payment of 2 PJP shares for every 3 YP shares.
Required:
a. Calculate the current P/E ratios of PJP and YP. (2 Marks)
b. Estimate the expected post-acquisition earnings per share and comment upon the importance of increasing the earnings per share. (4 Marks)
c. Estimate the effect on the combined market value as a result of the takeover using:
i. P/E-based valuation
ii. Cash flow-based valuation
State clearly any assumptions that you make. (5 Marks)
d. Discuss the limitations of your estimates in (c) above. (3 Marks)
e. Evaluate the strategic implications of making a hostile bid for a company compared with an aggressive investment program of organic growth. (6 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Market Value, P/E Ratio, post-acquisition EPS, Synergy, takeover strategy, Valuation Techniques
- Level: Level 3
- Topic: Mergers and acquisitions