Mutual Health, a listed company in Hong Kong plans to acquire Shanghai Fosun Pharmaceutical (2196.hk), a Shanghai-based company listed on both the Hong Kong and Shanghai Stock Exchanges.

Mutual Healths share price is HK$42 with 5,620 million shares outstanding. Shanghai Fosun is trading at HK$35 with 552 million shares outstanding.

As the companies can share R&D, the acquisition would generate significant synergies which are estimated to be HK$60 million per year from next year onwards, growing at 2% per annum.

The WACC of Mutual Health is 9.0% while Shanghai Fosun is 10%.

Required:

Assume that the acquisition will occur with certainty and all market participants are aware of the acquisition when the takeover is announced (ignore the time value of money).

1. If Mutual Health makes a cash offer to Shanghai Fosuns shareholders at a 20% premium to its current share price,
   1. What would the price of Mutual Health be on the announcement? (5 marks)
   2. What would the price of Shanghai Fosun be on the announcement? (3 marks)
2. If Mutual Health makes a stock offer with an exchange ratio of 1 to 1, which is effectively a premium of 20% based on the share prices of the two companies.
   1. What would the price of Mutual Health be on the announcement? (5 marks)
   2. What would the price of Shanghai Fosun be on the announcement? (3 marks)
3. Based on the expected share prices,
   1. which offer is better for Mutual Healths shareholders? What is the reason for the difference? 2 marks)
   2. which offer is better for Shanghai Fosuns shareholders? What is the reason for the difference? (2 marks)