ABC, is a travel agency fully funded by equity which obtained a listing 8 years ago. Whilst ABC has previously experience rapid growth in earning before tax, problems arose soon after the listing as competition intensified. Although the company remains profitable, annual growth has declined significantly.

The board is concerned by the lack of future growth opportunities. The current share price of RM90 reflects these concerns, trading well below the offer price 8 years ago. Its earning per share and dividend per share are expected to stay at RM5 and RM3 next year. ABC has 1 million outstanding shares now. The directors have decided to invest in a market development strategy for future growth, utilizing significant cash reserves to acquire companies in other areas of the country where competition is less intense. The board has identified a potential target, XYZ Bhd.

XYZ Bhd

It is also a public listed company, established 10 years ago. Significant unrelieved losses were incurred in the early years of development although the company is now profitable and is expected to grow steadily at 6% in earnings and dividends. XYZ has 600,000 outstanding shares currently selling at RM20. The next years earning per share and dividend per share is expected to reach RM1.50 and RM0.80 respectively

Acquisition information

After the acquisition, the new management could increase the growth rate of XYZ Bhd to 8% per year, without any additional capital investment required.

ABCs board is keen on launching a cash offer or share-for-share offer to secure the bid. The directors are willing to pay RM25 in cash for each XYZs shares, or offer one ABCs shares for every three XYZs shares.

Required:

1. Determine the gain in synergy from the acquisition (5marks)
2. Evaluate which way of the financing yields a higher value to ABCs shareholders.(10 marks)