Byder plc is considering a possible acquisition of Targetty plc. You have been asked to evaluate the merits of the proposed merger. Here are the data on the two companies before the acquisition. Shares outstanding P/E ratio Expected EPS Targetty Byder 1,000m 5,000m 10 2 0.5 3 Byder has valued the synergies from the merger as being 2,500m. (a) If Byder wishes to finance the acquisition with shares in the merged firm, what is the maximum number of shares it would be willing to offer to Targetty's shareholders? (7 marks) (b) What would be the consequences of such a bid on expected earnings per share of Byder if we assume that the synergies will lead to an increase in expected earnings of 200m in the first year? Does the effect on earnings per share of the merged firm affect the merits of the transaction? (5 marks) (c) Instead of the share exchange, Byder has sufficient surplus cash on its balance sheet to finance the acquisition with a cash offer. Alternatively, Byder could return the cash to its shareholders before making the bid, and continue with the share exchange. How would you advise Byder to decide between the share offer and returning the cash to shareholders versus using the cash to make the acquisition? (7 marks) (d) Independently of the specific example above, discuss the validity of risk diversification as a motivation for companies engaging in merger and acquisition activity. (6 marks)