Question
DULPIE is considering a takeover bid for FAST. DULPIE`s board of directors has issued the following statement: Our superior P/E ratio and synergistic effects of
DULPIE is considering a takeover bid for FAST. DULPIE`s board of directors has issued the following statement: "Our superior P/E ratio and synergistic effects of the acquisition will lead to a post-acquisition increase in earnings per share and in the combined market value of the companies".
Summarized financial data for the
companies ($million)
DULPIEFAST
Sales48,0035,30
Profit before tax
6,304,10
Tax-1,89-1,23
Profit after
tax4,412,87
Dividends2,001,10
Non current Assets
(net)28,4026,50
Current
Assets
22,6417,30
Total
Assets51,0443,80
Equity and
liabilities
Ordinary Shares (10 cents par
value)4,003,00
Reserves
21,1219,20
Medium and long term
borrowing8,6011,40
Current
liabilities
17,3210,20
51,0443,80
Notes:
i.After
tax savings in cash operating costs of $750,000 per year indefinitely are
expected as a result of the acquisition
ii.Initial
redundancy costs will be $1 million before tax
iii.DULPIE`s
cost of capital is 12%
iv.Current
share price are: DULPIE 290 cents, FAST 180 Cents
v.The
proposed terms of the takeover are payment of 2 DULPIE shares for every 3 FAST
shares
Required:
a.Calculate
the current P/E ratios of DULPIE and FAST
b.Estimate
the expected post acquisition earnings per share and comment upon the
importance of increasing the earnings per share
c.Estimate
the effect on the combined market value as a result of the takeover using:
i.P/E
based valuation
ii.Cash
flow based valuation
State Cleary any assumption that
you make
d.Discuss
the limitations of your estimates in (c) above
e.Evaluate
the strategic implications of making a hostile bid for a company compared with
an aggressive investment programme of organic growth
f.The
regulation of takeovers varies from country to country. Outline the typical
factors that such regulation includes.
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