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QUESTION 4 Navidale, a listed engineering company, manufactures large scale plant and machinery for industrial companies Until ten years ago, Navidale Limited pursued a strategy of organic growth. Since then, it has followed an aggressive policy of acquiring smaller engineering companies, which it feels have developed new technologies and methods, which could be used in its manufacturing processes. However, it is estimated that only between 30% and 40% of the acquisitions made in the last ten years have successfully increased the company's shareholder value Navidale Limited is currently considering acquiring Lochinvar, an unlisted company, which has three departments Department A manufactures machinery for industrial companies, Department produces electrical goods for the retail market, and the smaller Department C operates in the construction industry. Upon acquisition, Department A will become part of Navidale, as it contains the new technologies which Navidale is seeking, but Departments and will be unbundled, with the assets attached to Department C sold and Department B being spun off into a new company called Ndege Co. Given below are extracts of financial information for the two companies for the year ended 30 April 2014 Navidale Co R million 790-2 Lochinvar Co R million 124-6 Sales revenue 37-4 Profit before depreciation, interest and tax (PBDIT) Interest Depreciation 244-4 13-8 72-4 43 10-1 Pre-tax profit 158-2 1426 24- 7 secured bond Other non-current and current l Share capital 50c/share es 2124 1000 4641 Share of current and non-current visand Navidale Co's the department Department Department Department Share of it and pret t I One information t is estimated that for Department there able value of its mon current assets 100% of their back walue, but its current a nd realisable value is only 90% of their book value. The costs related to dosing Department Care estimated to be 3 million The funds raised from the disposal of Department wilt used to pay off Lonchiar Co's other non-current CUTET Ibistes can be assumed that the current market value of The unsecured bond will be taken over by Ndege Co the bond is equal to its book value M present around of Depart o come from mat Department M ere Co's cost of capital estimated to be 10%. It is estimated that in the test war of operation de Castree cash flows to fim wil grow by 20, and then by 5 annually thereafter. The tax rate applicable to all the companies is 20%, and Ndege Co can claim 10% tax allowable depreciation ons non-current assets it can be asumed that the amount of tax allowable depreciation is the same as the investment needed to maintain Ndege Co's operations Misal Ca's current share price is R3 per share and it is estimated that lochimar Co's price-to-earnings (PE) is higher than Navidale Co's PE ratio. After the acquisition when Department A becomes part of widgle Cois estimated that Navidale Co's PL ratio will increase by 15% that the combined company's mulher tax earnings will increase by R7 million due to the benefits from combin a tie co and Depart O s the possible reasons why Navidle Co may have switched its strategy of organic growth to one of rowing by acquiring companies she site actions Navidale o could take to reduce the risk that the acquisition of Lochinace als to increase shareholder value