Question 1 - Mergers and Acquisitions (20 marks - 30 minutes)

MTM owns and runs mobile telephony networks in Africa and South America, servicing individual and corporate clients with a range of voice and data products. Recent growth in their markets driven by growth in personal income and corporate profitability has led to their having a very strong balance sheet. MTM Ltds current market capitalisation is R50bn, and there are 1 bn shares in issue.

Bell-D owns mobile telephony networks in North America, Australia and Asia. Growth in these markets have been depressed recently but the company has just won industry awards for the development of a radical new communications technology that significantly improves effective bandwidth trhough existing networks. This is very attractive to MTM as connectivity in their markets is limited and this would allow them to offer more competitive connection speeds and volumes. However, it would require significant additional capital investment to roll it out across their networks. In addition MTM has spent significantly on R&D in the same area, but using a different technological approach. Their team has not cracked the problem, but believe that they are very close and that their approach is potentially superior to the Bell-D technology.

MTM believes that that combination of the two companies is a very good idea as it presents investors with a geographically diversified portfolio underpinned by combination of world class technology (Bell-D) and management (MTM).

MTM Ltd has agreed to buy Bell-D Ltd for R15.50 a share. Bell-Ds current share price is R10/share (recently up from R5/share following the announcement of the award) and it has 50m shares in issue. Based on their analysis of Bell-D's assets and technology, the maximum share price that MTM would have paid for Bell-D is R25/share. The company is going to issue new shares to fund the purchase. You can assume that they can issue these shares at the current share price.

a. Show that, given the information provided, the expected value of the synergies of MTM merging with Bell-D is R750m. (Hint - consider the maximum share price that MTM would have paid).

(3 marks)

b. How many of its own shares will MTM have to issue to fund the purchase of Bell-D?

(2 marks)

c. Given the answers to the previous two questions, what is the expected price per share of MTM if the deal goes through on these terms?

(2 marks)

d. What the expected NPV of the purchase of Bell-D for shares of MTM?

(3 marks)

e. Give three reasons why this deal could deliver the expected value-add to MTM.

(4 marks)

f. Explain what warning signs there are regarding its ability to deliver the expected value to MTM.

(4 marks)

f. Assume that the MTM share price fell to R45/share on the announcement of the deal. Should the deal still be done? (NB: No additional calculations are required)

(2 marks