Alpha plc, a dynamic, fast-growing business in microelectronics, has just made a bid of 17 of its own shares for every 20 shares of Beta plc, which manufactures a range of electric motors.

Financial statements for the two businesses are as follows:

Income statements for the year ended 31 March Year 9 Alpha plc Beta plc

£000 £000 Sales revenue 3,000 2,000 Operating profit 300 140 Interest (100) (10)

Profit before tax 200 130 Tax (100) (65)

Profit for the year 100 65 Other information:

Alpha plc Beta plc Number of issued shares (million) 1.0 0.5 Earnings per share 10p 13p Price/earnings ratio 20 10 Market price per share 200p 130p Capitalisation (that is, market price per share × number of shares) £2m £0.65m Dividend per share 2p 6p Dividends paid and proposed 20,000 30,000 Historical share prices (in pence) at 31 March each year have been:
Year 4 Year 5 Year 6 Year 7 Year 8 Alpha plc 60 90 150 160 200 Beta plc 90 80 120 140 130 Statements of financial position (balance sheets) at 31 March Year 9 Alpha plc Beta plc £000 £000 Non-current assets 1,200 900 Current assets 900 700 Total assets 2,100 1,600 Equity Share capital £0.25 ordinary shares 250 125 Retained earnings 750 755 1,000 880 Non-current liabilities – loans 800 120 Current liabilities 300 600 Total equity and liabilities 2,100 1,600 The merger of the two businesses will result in post-tax savings of £15,000 per year to be made in the distribution system of Alpha.
One of the shareholders of Beta has queried the bid and has raised the following points. First, he understands that Alpha normally pays only small dividends and that his dividend per share will decrease. Secondly, he is concerned that the bid undervalues Beta since the current value of the bid is less than the figure for shareholders’ funds in Beta’s balance sheet.
Required:

(a) Calculate the bid consideration.

(b) Calculate the earnings per share for the combined group.

(c) Calculate the theoretical post-acquisition price of Alpha shares assuming that the price/earnings ratio stays the same.

(d) Comment on the shareholder’s two points.
(Hint: In order to answer this question you need to calculate the number of shares to be issued by Alpha and the total profit after tax following the merger. The market value of the shares following the merger can be found by rearranging the P/E ratio equation and inserting the relevant figures.)