Merge and Acquisition On 19 October 2016, Tatts Group Limited (Tatts) and Tabcorp Holdings Limited (Tabcorp) announced a Merger Implementation Deed to combine the two companies and create a diversified gambling entertainment group with a pro forma enterprise value of AUD11.3 billion. The share prices of Tatts and Tabcorp were $4.16 and $5.06 on 19 October 2016 respectively. The merger was via a scheme of arrangement that offered cash and scrip with Tatts shareholders receiving 0.80 New Tabcorp Shares and 42.5c cash for each Tatts share. Tabcorp, a gambling entertainment company, had an AUD4 billion market capitalisation before the scheme announcement. It operated three core businesses – Wagering and Media, Keno, and Gaming Services – employed over 3,000 people, had revenue of AUD2.15 billion in FY15, and AUD334.5 million net income. Tatts, before merging with Tabcorp, provided gambling services with an AUD5.8 billion market capitalisation. Through its lottery, wagering and gaming operations Tatts reported FY15 revenue of AUD2.9 billion and net income of AUD 233.8 million. In theory, companies with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value and it must have a cultural fit even when the decision financially makes sense.

REQUIRED:

1: Why did Tabcorp want to take over Tatts? Please discuss the synergies associated with this merge. (4 Marks)

2: Please outline the potential risks associated with this merge. (4 Marks)

3: The Tatts shareholders received 0.80 Tabcorp Shares and 42.5c cash for each Tatts share. Is this a good deal for Tatts shareholders from EPS and share price perspectives? (6 Marks)

4: If we re-examine this merge case in 2020, do you think this merge is successful? Why ? (6 Marks)