Merger and Acquisition

Question 1

Consider the following per-merger information of Firm B and Firm T. Assume that both firms
have no debt outstanding.

Firm B Firm T
Shares outstanding 1,500 900
Price per share RM30 RM20

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
RM6,000. Suppose Firm T is agreeable to a merger by an exchange of stock at a price of RM25
per each share.

Required:
a. What is the value of synergistic benefits that arise from the acquisition of Firm T?
b. What is the value of Firm T to Firm B?
c. What is the NPV for acquiring Firm T?

Question 2

Consider the following pre-merger information about Mega Corporation and Jaya-Maju
company:

Mega Jaya-Maju
Shares outstanding 500,000 250,000
Price per share RM35 RM13

Both firms are 100% equity financed. The incremental after-tax cash flow of the proposed
acquisition is estimated to be RM120,000 per annum to perpetuity. The discounting rate is 10%.
Jaya-Maju is willing to be acquired for RM16 per share in cash.

Required:
a. What is the value of synergistic benefits that arise from the acquisition of Jaya-Maju
Company? (1 mark)
b. What is the merger premium per share in this situation? (2 marks)
c. What is the value of Jaya-Maju Company to Mega Corporation? (3 marks)
d. What is the NPV for acquiring Jaya-Maju Company? (3 marks)
e. What is the price per share of the merged firm after the acquisition is completed?
(3 marks)

1
Question 3

Consider the following pre-merger information about GAB Bhd. and Paragon Bhd.:

GAB Bhd. Paragon Bhd.

Shares outstanding 400 million 100 million
EPS RM0.98 RM0.65
P/E 15 10
Price per share RM14.70 RM6.50

GAB Bhd. is considering acquiring Paragon Bhd. as part of its competitive strategy. GAB Bhd. is
evaluating two possible options either to pay RM7.30 in cash for every share of Paragon Bhd. or
to offer 1 of its share in exchange for 2 shares of Paragon Bhd. Both firms are 100% equity-
financed. GAB Bhd. estimates that the incremental benefit from this exercise to be worth RM125
million.

Required:

a. Analyze which acquisition option should GAB Bhd. choose. (14 Marks)

b. What is the acquisition premium based on (a)? (2 Marks)

c. Describe why is diversification by itself not a good reason for a merger or acquisition.
(4 Marks)
(Total: 20 Marks)
Question 4

Consider the following pre-merger information about Kawan Bhd. and Keywest Bhd.

Kawan Bhd. Keywest Bhd.

Shares outstanding 15,000,000 4,000,000
EPS RM1.15 RM0.82
P/E ratio 8 5
Price per share RM9.20 RM4.10

Kawan Bhd. is considering acquiring Keywest Bhd. as part of its competitive strategy. Kawan
Bhd. is evaluating two possible options either to pay RM4.30 in cash for every share of Keywest
Bhd. or to offer 1 of its share in exchange for 2 shares of Keywest Bhd. Both firms are 100%
equity-financed. Kawan Bhd. estimates that the incremental benefit from this exercise to be
worth RM2,000,000.

Required:

a. Calculate the value of Keywest Bhd. from Kawan Bhd. point of view. (2 Marks)
b. Estimate the cost to Kawan Bhd. for each option. (7 Marks)
c. Choose the best alternative for Kawan Bhd. (3 Marks)
d. Explain FOUR (4) defensive tactics that the management of Keywest Bhd. might
employed to resist the takeover by Kawan Bhd. (8 Marks)

(Total: 20 Marks)

2
Question 5

Consider the following pre-merger information about Gabriele Berhad and Aurora
Berhad:

Gabriele Aurora
Shares outstanding 10,000,000 5,000,000
Price per share RM8.50 RM3.80

Both firms are 100% equity financed. Gabriele Berhad estimates that the value of the
synergistic benefit from acquiring Aurora Berhad is RM6,000,000. Gabriele Berhad is
trying to decide whether to offer 30 percent of its stock or RM5.20 in cash for each
share to Aurora Berhad.

From the above information you are required to:

a. briefly explain THREE (3) other possible reasons for the estimated incremental
benefits in this acquisition. (6 Marks)

b. calculate the value of Aurora Berhad to Gabriele Berhad. (2 Marks)

c. choose the alternative option for Gabriele Berhad and explain the possible
drawbacks of the option chose.
(12 Marks)
(Total: 20
Marks)
***the end***