Subject : CORPORATE FINANCE

Topic : MERGER AND ACQUISITION

Indera Bhd is considering a potential acquisition of Pelangi Bhd by offering a cash offer at RM21 in exchange for all shares of Pelangi Bhd. However, the shareholder of Pelangi Bhd feels that a cash offer of RM25 would be more acceptable. Consequently, an extra cash payment is required that will reduce the value of Indera Bhd. Information about each firm is provided as follows: Both companies are growing at an average rate of 5% per annum. Indera Bhd is keen to incorporate technology innovations that will boost sales revenue in Pelangi Bhd, which is expected to grow to 7% per annum if the acquisition is successful. Required: a. Calculate the following: i. Net present value of the merger at the price offered by Indera Bhd. ii. The additional cost for Indera Bhd if requests from the shareholder of Pelangi Bhd are accepted. (10 marks) b. Based on the answer in (a)(i), if Indera Bhd offers a shares swap of 1.6 million units in exchange for all the shares of Pelangi Bhd, advise the shareholder of Indera Bhd on the better choice of option for the acquisition. (Note: Show all workings)