GASTRONOMICS has made a takeover bid for DELECTIBLE, a small company engaged in food manufacturing. The offer price is €100 in cash for every share in DELECTIBLE.

Prior to the bid announcement the market price of DELECTIBLE’s shares was €90.

DELECTIBLE’s board strongly recommends that its shareholders reject this offer on the grounds that the company’s shares are worth more than €100. In particular, they argue that, as DELECTIBLE’s earnings per share for the past year were €25, GASTRONOMICS’ offer values DELECTIBLE on a price-to-earnings (PE) ratio of only 4.0. Because the average PE ratio for companies engaged in food manufacturing is currently 7.0, DELECTIBLE’s board argues that the company shares must be worth at least €175 and that an offer of €200 would be more realistic considering the company’s growth opportunities.

DELECTIBLE’s shareholders seem convinced, and, as DELECTIBLE’s shares currently stand at €115 in the market, GASTRONOMICS’ bid appears to have little chance of succeeding. GASTRONOMICS is considering whether to make an increased offer, and, if so, at what price. As an adviser to GASTRONOMICS, you are asked to write a brief report explaining the principles of acquisition valuation and how GASTRONOMICS should establish the maximum bid price.