Q.1.

A company M/s Acquirer Ltd. Wants to acquire another company M/s

Target Ltd. At the announcement of the offer the share price ofAcquirer
Ltd was Rs.21.86 and that of Target Ltd. was Rs.8.85. Acquirer Ltd.
offered two of its shares and Rs 12 for every 5 shares of the Target Ltd.
The final offer by Acquirer Ltd. ,after the negotiations were over, was
Rs.13.25 plus 2 of its shares for every 5 shares of Target Ltd.

The relevant statistics of the two companies are as under: (All

figures in millions)/(Rs)
A.Pre-Acquisition Yr-I Yr-II Yr-III Yr-IV Yr-V
Thereafter
Acquirer Ltd.
FCFF 302.7 453.2 484.8 350.3
421.1 5%
Debt 628.8 582.2 533.2 534.0 517.7
D/E 30% 30% 30% 30% 30% 30%
Cost of Debt ------------------------
5%--------------------------------------
Expected rate of
return on equity -----------------------20%---------------------------------------
Shares on issue 375 million
Share Price 21.86
Risk Free Rate 5%
Market Risk Premium 7%
Unlevered Beta 0.70
Tax rate 30%
EPS
Target Ltd.
FCFF 46.8 147.1 150.0 153.0 156.1
2%
Debt 498.0 487.0 475.7 464.2 452.5
D/E 30% 30% 30% 30% 30% 30%
Cost of Debt ------------------------
7%--------------------------------------
Expected rate of
return on equity -----------------------20%---------------------------------------
Shares on issue -----------------------196
million------------------------------
Share Price 8.85
Tax Rate 30%
Risk Free Rate 5%
Market Risk Premium 7%
Unlevered Beta 0.90
EPS 0.53
B. Control benefits
Acquirer Ltd believes that it can grow the FCFF of Target Ltd. by 10.0
million from 3rd year onward instead of what has been projected by
Target Ltd above in A.
C. Synergies
The synergies from the acquisition are expected to be 20 million per
year starting from the 3rd year onwards.
Calculate ------(Assuming zero transaction costs)
i. the valuation of share price of Target Ltd as done by Acquirer
Ltd at the time of announcement of the offer.
ii. the valuation of share price of Target Ltd as done by Acquirer
Ltd at the end of the negotiations.
iii. The value of the final entity and its share price.
iv. Implied growth of Target Ltd. Pre acquisition
v. Present value of growth opportunities
vi. The growth hurdle that must be achieved in target Ltd before
the acquisition starts adding value to the shareholders of Acquirer Ltd.
vi. Is Acquirer ltd. paying a premium over and above the market
value of Target Ltd.? If so what could be the reasons. If not, what could
be the reasons.
vii. If the acquisition bid was a hostile one. How could Target ltd.
defend itself?
Q.2. Acquirer Limited is considering the acquisition of Target Limited.
Both entities are all-equity financed. Acquirer has a market value of
$2 billion and 200 million shares on issue. Target has a market value
of $400 million and 25 million shares on issue.
Following publication of a report of an independent expert, the Board
of Target have indicated that shareholders should accept an offer that
values the entity at $480 million. You are a shareholder in Acquirer,
and following completion of your MBA, apply your skills to privately
estimate synergies to be $14 million per year. The appropriate after-
tax discount rate is 10%.

The public offer is 1.92 Acquirer shares for each Target share.

(a)What is the premium being offered in the acquisition?

(b) What will be the value of the new entity if the acquisition
proceeds?
(c)What will be the share price of the new entity?
(d) Given your estimate of the synergies in the transaction, how
would you recommend that the structure of the offer change?
Assume Arcane has no surplus cash and the firm does not intend to
issue debt to finance the transaction.

Q.3. Value a company ABC Ltd. using the following data:

 -Enterprise Value to EBITDA (business operations only)
multiple of 5 recent transactions in this industry: 10.1, 9.8,
9.2, 10.5, 10.3.
-Recent EBITDA of target company = $20 million
-Cash in hand of target company = $5 million
-Marketable securities held by target company = $45 million
-Interest rate received on marketable securities = 6%.
-Sum of long-term and short-term debt held by target = $75
million

Q.4. Suppose Acquirer Limited makes an offer for Ttarget Limited

under which Acquirer offers $4 cash and 7 Acquirer shares for
every five Target share. You are responsible for structuring the
transaction. The share price of the acquiring firm is $6.80 pre-
announcement, and you estimate that the market will view this deal
positively, such that the price of Acquirer will rise. This has
influenced the structure of your offer.

The value of Target pre-deal is $800 million. You estimate the

present value of control benefits to be $100 million and the present
value of synergies to be $250 million. target has 100 million
shares on issue.

(a)At what price does your offer value the target firm, using the pre-
announcement share price of the acquiring firm? What is the
premium in the offer?
(b) Suppose the share price of Acquirer Limited rises to $7.95 per
share over the offer period. At this price, does the deal create value
for shareholders in the bidding firm?
(c) What would be the breakeven price for Acquirer in this
transaction?

Q.5. Bring out the difference between the following forms of

restructuring:
i.Equity carve outs
ii.Spin offs
iii.Tracking stock