AM Jewellery specialises in the import and distribution of artisan jewellery from Europe. The business currently supplies independent jewellers on the New South Wales south coast, targeting medium-income customers. It is considering launchinga takeover of Tri-Beauty Corporation as the owner of the latter is selling the company due to retirement.

Tri-Beauty owns boutique jewellery shops in local shopping centres, and through years of operation, has accumulated a stable customer base. AM Jewellery (the acquirer) plans to merge the customer database for future promotion campaigns. The business proposal also indicates that the two companies' supply and delivery channels can be integrated for a higher efficiency. The business analyst at AMJewellery estimates that the acquisition will help increase the before-tax cash by $25m per year.

You are also given the following information regarding the acquirer and the target:

AMJewellery

Tri-Beauty

Assets ($m)

5000

800

Debt ($m)

3200

100

Share price ($)

60

35

Number of shares (m)

30

20

The corporate tax rate is 40%, and the appropriate discount rate for the combined company is 10%. For the following questions, please ignore all transaction costs and fees.

(a) Name two types of synergies that will arise in this acquisition deal. For each synergy type, identify the source of value creation given the company specifics. Calculate the value of the after-tax synergies.

(b) AM Jewellery is proposing a share offer to the target company's board. What is the maximum exchange ratio that can be offered by the acquirer?

(c) If the offered exchange ratio is 0.5, do you think the target company should agree to the deal? If not, name two defence strategies that can be used by the target company's board of directors. Briefly explain how the strategies can be implemented.

(d) After the first round of negotiation, the target company agrees to receive one-third of the synergies, on condition that the acquirer makes a cash offer.Calculate the number of shares that need to be issued by the acquirer to fund the acquisition.

(e) If the cash offer goes through, what is the share price of the combined company after the acquisition?Remember to adjust the acquirer's company value by the newly issued shares as in part (d).