4M Jeffrey Hunter is the founder and chief executive officer of Beta Inc., a US listed company established 10 years ago. Jeffrey is energetic and ambitious, and aims to make his young company the market leader within 5 years. He makes an offer to acquire Gamma Inc., an old-fashioned family-owned company of a similar size to Beta but with volatile profits in recent years. Jeffrey is of the opinion that Gamma lacks strong leadership and marketing strategy. He feels that he could make the company much more profitable by applying the current practices adopted in Beta. A summary of the financial data before the bid is as follows: Beta Gamma Number of shares in issue $40M $44M Earnings available to ordinary shareholders 4.4M P/E ratio 20 10 Jeffrey has applied Beta's P/E ratio (20) to the combined earnings of the new entity and arrived at the following estimation of post-acquisition values. Estimated market capitalization $168M Estimated share price $2.625 Estimated EPS $0.13125 Estimated equivalent value of one old Gamma share $1.432 The offer is six shares of Beta for eleven Gamma shares. The offer is not expected to result in any immediate savings or increase in operational cash flows. Required: a Show how Jeffrey calculated his estimate of post-acquisition values. (12 marks) b Discuss the assumptions made by Jeffrey and calculate an alternative post-acquisition value for the company. (6 marks) c Calculate the maximum price Beta could afford to pay without reducing its shareholders' wealth (assuming your alternative post- acquisition value for the merged company in (b) is correct). What will the exchange ratio be? How many Gamma's shares are exchangeable for share of Beta? (7 marks) 4M Jeffrey Hunter is the founder and chief executive officer of Beta Inc., a US listed company established 10 years ago. Jeffrey is energetic and ambitious, and aims to make his young company the market leader within 5 years. He makes an offer to acquire Gamma Inc., an old-fashioned family-owned company of a similar size to Beta but with volatile profits in recent years. Jeffrey is of the opinion that Gamma lacks strong leadership and marketing strategy. He feels that he could make the company much more profitable by applying the current practices adopted in Beta. A summary of the financial data before the bid is as follows: Beta Gamma Number of shares in issue $40M $44M Earnings available to ordinary shareholders 4.4M P/E ratio 20 10 Jeffrey has applied Beta's P/E ratio (20) to the combined earnings of the new entity and arrived at the following estimation of post-acquisition values. Estimated market capitalization $168M Estimated share price $2.625 Estimated EPS $0.13125 Estimated equivalent value of one old Gamma share $1.432 The offer is six shares of Beta for eleven Gamma shares. The offer is not expected to result in any immediate savings or increase in operational cash flows. Required: a Show how Jeffrey calculated his estimate of post-acquisition values. (12 marks) b Discuss the assumptions made by Jeffrey and calculate an alternative post-acquisition value for the company. (6 marks) c Calculate the maximum price Beta could afford to pay without reducing its shareholders' wealth (assuming your alternative post- acquisition value for the merged company in (b) is correct). What will the exchange ratio be? How many Gamma's shares are exchangeable for share of Beta? (7 marks)
