Topic: Mergers and acquisitions

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FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Question

Obong plc recently received a takeover bid from Abdul plc. If the bid for Obong plc is successful, it will provide Abdul plc the needed competitive edge in research and development to expand its laboratories into the production of the COVID-19 vaccine.

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

b. If Obong plc accepts the bid from Abdul plc, it is estimated that the new growth rate will rise to 12% for the first 3 years and thereafter stabilize at 7%. Calculate the new share price to the shareholders of Obong plc. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

d. According to Efficient Market Hypothesis (EMH), it is believed that the market would react instantly and accurately to the merger announcement between Obong plc and Abdul plc.
Define briefly the THREE forms of EMH and their implications to the market. (9 Marks)

Answer

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Tags: Dividend growth model, Market Efficiency, Share Price Estimation, Takeover Analysis
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2023 – L3 – Q1b – Mergers and Acquisitions

Discuss the typical factors included in takeover regulations across countries.

Question

b. The regulation of takeovers varies from country to country.

Outline the typical factors that such a regulation includes. (4 Marks)

Answer

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Tags: Fair Valuation, Shareholder Rights, Takeover Regulation, Transparency
Level: Level 3

Topic: Mergers and acquisitions

FM – Nov 2016 – L3 – Q7 – Mergers and Acquisitions

Advise Inkline Plc on expansion through mergers or acquisitions, potential benefits, demerits, alternatives, and target criteria.

Question

One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.

Inkline Plc, one of your client companies, is intending to expand its business by means of a merger or acquisition. Your firm of management consultants has been asked to advise the management of the company on what steps to take while considering the merger and acquisition methods and whether it should go ahead with the expansion program or otherwise.

Required:

(a) Advise your client on:
(i) Four benefits derivable from its proposed means of expansion. (4 Marks)
(ii) Three probable demerits of employing its proposed method of expansion. (3 Marks)

(b) State two alternatives to merger and acquisition in your report. (2 Marks)

(c) Where the company decides to go ahead with either of these methods, indicate three criteria the company may consider in choosing its target company. (6 Marks)

Answer

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Tags: Acquisitions, Alternatives, Business Expansion, Mergers, Strategic Criteria
Level: Level 3

Topic: 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.

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

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)

Answer

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Tags: Market Value, P/E Ratio, post-acquisition EPS, Synergy, takeover strategy, Valuation Techniques
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

Question

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Answer

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Tags: Conflict of Interest, Corporate finance, Managerial Agency, Mergers, Shareholders, Synergy
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2024

FM – May 2018 – L3 – SC – Q6 – Mergers and Acquisitions

Key factors for target selection and consideration form in acquisition decisions for Okpara Plc.

Question

Okpara Plc. is a large publicly quoted company in the eastern part of Nigeria. It operates in the home appliances industry with significant market share. In a recent strategy meeting, the directors decided to pursue aggressive growth through mergers in other parts of the country and along the ECOWAS sub-region.

Required:

Prepare a report to the Board of Directors of Okpara Plc. to address the following matters:

a. Six factors to be considered when choosing a target for acquisition.
(9 Marks)

b. Four factors which a bidding company should take into account in deciding the form of consideration to be offered.
(6 Marks)

Answer

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Tags: Acquisition strategy, Bidding Process, Growth Strategy, Merger Considerations, Strategic Financial Management, Target Selection
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2018

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Question

Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.

Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year	2023	2022
N’m	N’m
Non-current assets (including investment in Toba plc)	602.8	499.4
Current assets	265.0	180.4
Total Assets	867.8	679.8
Current liabilities	199.2	136.8
Total assets less current liabilities	668.6	543.0
Non-current liabilities	149.5	159.4
Net assets	519.1	383.6
Issued share capital (ordinary shares of ₦1 each)	100.0	73.6
Share premium	84.0	12.4
Profit or loss account	335.1	297.6
Total Equity	519.1	383.6
Sales revenue	1320.6	496.0
Earnings after tax	51.50	37.60
Dividend	14.0	14.0
Retained profits	37.5	23.6

All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?

(8 Marks)

Answer

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Tags: Earnings Per Share, Financial strategy, Loan Stock, Mergers and Acquisitions, Pharmaceutical Sector, Share-for-Share Offer, Shareholder Considerations, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2023

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

Question

The following case relates to a business expansion decision for Abayomi Plc (AP):

Abayomi Plc (AP) is a major electrical company in Nigeria. The directors have recently identified Togo as a priority location for business expansion. Togo uses currency T$. Assume today is 30 August 2021.

Company K3, located in Togo, has been identified as a potential acquisition target. AP already manages two business units in Togo, named K1 and K2, and these have shown strong performance under AP’s ownership.

K3 is particularly attractive to AP because it has its own warehouse, distribution, and logistics network, all of which could be used by K1 and K2, if the acquisition goes ahead. Currently, K1 and K2 send goods to customers from AP warehouses located in Ghana. This involves considerable cost and delay in delivery.

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings	375
Share capital (T$1 ordinary shares)	90
Total liabilities	465
Net assets	180

Additional Data:

AP aims to maintain the same capital structure as AP. That is, gearing (debt/debt+equity) would be 25% based on market values. AP would guarantee K3’s new debt, which can be assumed to have the same risk profile as AP’s debt.

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

P/E ratio of 12.
Equity beta of 1.7 and debt beta of 0.4.
Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

P/E ratio of 14.
Equity beta of 1.5 and debt beta of 0.3.
Gearing (debt/debt+equity) based on market values of 25%.
AP pays 6.2% interest on its long-term borrowings.
Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

a. Advise on:
i. The types of synergistic benefit that might arise from the acquisition of K3. (8 Marks)
ii. Possible reasons why both one-off and ongoing synergistic benefits might not be achieved to the extent expected. (4 Marks)

b. Calculate:
i. A Weighted Average Cost of Capital (WACC) for use in valuing K3 based on the proxy company’s business and country risk and AP’s capital structure. (6 Marks)
ii. A range of values for the equity of K3 in T$ as at 1 January 2022 using the following methods:

Asset basis. (2 Marks)
P/E (including bootstrapping). (5 Marks)
DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

Answer

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Tags: Acquisition valuation, Business Expansion, Cost Analysis, Financial strategy, Foreign Operations, Logistics Integration, Strategic Management, Synergy
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2022

FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions

Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.

Question

Raymond Plc. is a successful IT services company incorporated 10 years ago. It was listed on the Stock Exchange 3 years ago. The company has a broad customer base mainly consisting of small and medium-sized companies. Raymond Plc. has achieved rapid growth in recent years by obtaining regular business from satisfied customers and also by acquiring other IT services companies.

The Directors of Raymond Plc. have identified Harold Limited, an unlisted company, as a possible acquisition target. Harold Limited has a number of large multinational clients, and, in general, its clients tend to be larger than those of Raymond Plc. If successful, the acquisition would go ahead on January 1, 2018.

Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:

Financial Item	Raymond Plc.	Harold Limited
Share capital (Ordinary ₦1 shares)	₦150m	₦40m
Market share price	₦4.90	N/A

N/A: Not applicable (not listed).

Additional information:

If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
The average ungeared Cost of Equity for the industry is 8%;
Both Raymond Plc. and Harold Limited are wholly equity financed; and
Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.

The Directors of Raymond Plc. are considering offering to purchase Harold Limited at a price of ₦7.00 per share. It is estimated that transaction costs of ₦8 million would be payable on the acquisition and that ₦2 million would be required in the first year to cover the costs of integrating the two companies.

Required:

(a) Calculate:
- i. The value of Raymond Plc. as at December 31, 2017.
- ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
- iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
(b)
- i. Explain how value might be created by the proposed acquisition. (2 Marks)
- ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
(c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
- i. Harold Limited’s shareholders.
- ii. Raymond Plc.’s shareholders. (8 Marks)

(Total 20 Marks)

Answer

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Tags: Acquisition, Cost of Equity, Free Cash Flow, Integration Costs, IT Services, Shareholder Analysis, Stock Exchange, Synergies, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2017

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Question

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

Answer

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Tags: Dividend growth model, Market Efficiency, Share Price Estimation, Takeover Analysis
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2023 – L3 – Q1b – Mergers and Acquisitions

Discuss the typical factors included in takeover regulations across countries.

Question

b. The regulation of takeovers varies from country to country.

Outline the typical factors that such a regulation includes. (4 Marks)

Answer

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Tags: Fair Valuation, Shareholder Rights, Takeover Regulation, Transparency
Level: Level 3

Topic: Mergers and acquisitions

FM – Nov 2016 – L3 – Q7 – Mergers and Acquisitions

Advise Inkline Plc on expansion through mergers or acquisitions, potential benefits, demerits, alternatives, and target criteria.

Question

One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.

Required:

(b) State two alternatives to merger and acquisition in your report. (2 Marks)

(c) Where the company decides to go ahead with either of these methods, indicate three criteria the company may consider in choosing its target company. (6 Marks)

Answer

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Tags: Acquisitions, Alternatives, Business Expansion, Mergers, Strategic Criteria
Level: Level 3

Topic: 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.

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

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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

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).

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:

Answer

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Tags: Market Value, P/E Ratio, post-acquisition EPS, Synergy, takeover strategy, Valuation Techniques
Level: Level 3

Topic: Mergers and acquisitions

FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

Question

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Answer

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Tags: Conflict of Interest, Corporate finance, Managerial Agency, Mergers, Shareholders, Synergy
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2024

FM – May 2018 – L3 – SC – Q6 – Mergers and Acquisitions

Key factors for target selection and consideration form in acquisition decisions for Okpara Plc.

Question

Required:

Prepare a report to the Board of Directors of Okpara Plc. to address the following matters:

a. Six factors to be considered when choosing a target for acquisition.
(9 Marks)

b. Four factors which a bidding company should take into account in deciding the form of consideration to be offered.
(6 Marks)

Answer

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Tags: Acquisition strategy, Bidding Process, Growth Strategy, Merger Considerations, Strategic Financial Management, Target Selection
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2018

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Question

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year	2023	2022
N’m	N’m
Non-current assets (including investment in Toba plc)	602.8	499.4
Current assets	265.0	180.4
Total Assets	867.8	679.8
Current liabilities	199.2	136.8
Total assets less current liabilities	668.6	543.0
Non-current liabilities	149.5	159.4
Net assets	519.1	383.6
Issued share capital (ordinary shares of ₦1 each)	100.0	73.6
Share premium	84.0	12.4
Profit or loss account	335.1	297.6
Total Equity	519.1	383.6
Sales revenue	1320.6	496.0
Earnings after tax	51.50	37.60
Dividend	14.0	14.0
Retained profits	37.5	23.6

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

(8 Marks)

Answer

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Tags: Earnings Per Share, Financial strategy, Loan Stock, Mergers and Acquisitions, Pharmaceutical Sector, Share-for-Share Offer, Shareholder Considerations, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2023

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

Question

The following case relates to a business expansion decision for Abayomi Plc (AP):

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings	375
Share capital (T$1 ordinary shares)	90
Total liabilities	465
Net assets	180

Additional Data:

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

P/E ratio of 12.
Equity beta of 1.7 and debt beta of 0.4.
Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

P/E ratio of 14.
Equity beta of 1.5 and debt beta of 0.3.
Gearing (debt/debt+equity) based on market values of 25%.
AP pays 6.2% interest on its long-term borrowings.
Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

Asset basis. (2 Marks)
P/E (including bootstrapping). (5 Marks)
DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

Answer

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Tags: Acquisition valuation, Business Expansion, Cost Analysis, Financial strategy, Foreign Operations, Logistics Integration, Strategic Management, Synergy
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2022

FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions

Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.

Question

Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:

Financial Item	Raymond Plc.	Harold Limited
Share capital (Ordinary ₦1 shares)	₦150m	₦40m
Market share price	₦4.90	N/A

N/A: Not applicable (not listed).

Additional information:

If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
The average ungeared Cost of Equity for the industry is 8%;
Both Raymond Plc. and Harold Limited are wholly equity financed; and
Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.

Required:

(a) Calculate:
- i. The value of Raymond Plc. as at December 31, 2017.
- ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
- iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
(b)
- i. Explain how value might be created by the proposed acquisition. (2 Marks)
- ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
(c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
- i. Harold Limited’s shareholders.
- ii. Raymond Plc.’s shareholders. (8 Marks)

(Total 20 Marks)

Answer

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Tags: Acquisition, Cost of Equity, Free Cash Flow, Integration Costs, IT Services, Shareholder Analysis, Stock Exchange, Synergies, Valuation
Level: Level 3