20 P Task 6: American Machine Building Industry (AMBI) is looking for an opportunity to develop a new market overseas. AMBI is listed at New York Stock Exchange with its shares. In Germany they found Franken Maschinenbau AG (FM) and they decided to contact the management and the shareholders of FM for a friendly takeover. FM has a lot of technical skills, that are expected to be very successful on the US-Market with AMBIs excellent marketing power. Other products of AMBI may enter the European market through FMs sales channels. At the end synergies are expected if both companies merge with each other. Consolidated earnings are expected to be 5.000.000 USD steadily higher than the total of the standalone earnings. Traditionally P/E-rations in Germany are lower than in the US, so from the perspective of the shareholders of AMBI the deal is really meaningful. Consider the hypothetical firms in the machine building industry shown in the following table: Company P/E Numer of Marketvalue Earnings EPS Total Market ratio shares per share Value FM 18 5.000.000 $72,00 $20.000.000 $4,00 $360.000.000 AMBI 30 10.000.000 $60,00 $20.000.000 $2,00 $600.000.000 AMBI offers a premium of 20 % for the outstanding shareholders of FM. The offer is completely paid with shares of AMBI. a) How many shares AMBI has to offer. Calculate the new market value of AMBI under the assumption that the old P/E ratio of 30 is still used by the capital markets participants. What are the EPS and the new stock market price of one share? Be aware of the outcome of the synergies and the rising earnings, b) Assume that the market is not so positive on the acquisition and is reluctant to recognize the promised additional earnings out of the synergies. The risk of the new company is perceived higher than before. The P/E ratio of the newly formed AMBI is lowered to 23 based on the new expected earnings. What would be the new market price per share of stock? What would be its percentage change? c) How would you expect the capital market to react? Please give a reason for your opinion