ACCA AFM Business Valuations - Payment Methods

ACCA Director Author

Payment Methods

Payment Methods

Contents:

Cash payment
Share for share exchange
Convertible bonds
Evaluations of financial offer

Referenced syllabus: C.4

Common payment methods

Cash payment – immediate cash payment; contingent or deferred consideration
Share for share exchange
Rights issue
Borrow and buy

Cash payment

Advantages	Disadvantages
Quick to complete the transaction	Damage liquidity
Not dilute shareholdings	May be subject to tax such as capital gains tax
Price is more certain than share for share exchange as the value would not fluctuate
Existing shareholders will not involve in business operations again once their shares are sold
With earn-out agreement (known as contingent consideration), acquirer’s interest is protected by setting up targets to be achieved by acquiree.

Share for share exchange

Advantages	Disadvantages
Useful to finance a large acquisition	Dilute shareholdings
Not affecting liquidity	Expensive issue costs

Convertible bonds

Advantages	Disadvantages
Less risky to bond holders compared to when they buy shares, as they receive fixed interest and have the chance to become shareholders potentially	Potentially dilute Earnings per Share (EPS)
	May need to finance the repayment when bond matures, and when holders decide to obtain cash payment rather than to become the shareholder

Evaluation of financial offer

Cash consideration:

Acquirer

Target company

In (increase in shareholder value) x

- Out (cash spent as cost) (x)

= Gain/loss x/(x)

Cash offer x

Exiting share price (x)

Gain/loss x/(x)

Share for share exchange:

	Acquirer	Target company
New value (post acquisition value)	New Share price (W)	(to have) New Share price(W)

Old value (pre-acquisition value)	Old share price	(Give up) Old share price
	Gains/loss	Gains/loss

(W) New share price:

MV of acquirer	X
MV of target Co	X
MV of synergy	X
Total value of new Co	X1

No of shares in acquirer	X
New shares issued to target Co	X
Total shares in new Co	X2

New share price= X1

Tutorial note about the target company:

For example, acquirer issues two new shares for every three existing shares in target company. To the target company:

To have: 2 new shares
To give up: 3 existing shares

Exam standard question - Nente Co

M plc is planning to acquire the entire N ltd either by a cash offer of $2.95 per share or a share for share exchange where two M Co shares would be offered for 3 N ltd shares.

Existing (old) share price of N, the company, is $2.9/share and for M plc is $4.8/share.
Both P/E ratio of M and N are 15.
Profit after tax of N ltd is $620 and for M plc is $3,200.
M plc expects a cost based synergy after acquisition of $150.
N ltd has 2,400 shares while M plc has 10,000 shares in issue.

Required:

Estimate the percentage gain in value to an N Co share and a M Co share under each payment offer.

Comment:

Cash consideration:

Acquirer(M plc)

Target company (N Co)

In(increase in shareholder value) 11,550 (W1)

-Out(cash spent as cost) (7,080)

$2.95/share x 2400shares

Gain/loss 4,470

Number of shares(M plc) 10,000

$0.447/share

Cash offer $2.95/share

Exiting share price ($2.9/share)

Gain/loss $0.05/share

In percentage= $0.447 = 9.3%

$4.8(M old share price)

$0.05 = 1.7%

$2.9

W1 In

P/E x (additional earnings (increase in N’s PAT+ synergy after tax))15 x (620+150) =11550

Share for share exchange:

	Acquirer (M plc)	Target company (N co)
New value(post acquisition value)	5.13 New Share price (W2)	5.13 x 2=10.28 (to have) New Share price (W2)

Old value(pre-acquisition value)	4.8 Old share price	2.9 x 3=8.7 (Give up) Old share price
	$0.33/share gain	$1.56/share gain
Percentage:	$0.33 =6.9% $4.8	$1.56 =17.9% $8.7

(W2) new share price

	$
MV of acquirer (M plc)P/E(m) x PAT(m) 15 x 3,200	48
MV of target Co (N co) P/E(n) x PAT(n) 15 x 620	9.3
MV of synergy P/E x synergy (savings):15 x150	2.3
Total value of new Co	59.6(X1)

No of shares in acquirer (M plc) 10,000	10
New shares issued to target Co (N co) (2400/3 X2 =1600)	1.6
Total shares in new Co	11.6 (X2)

New share price= X1 = $59.6 = $5.13/share

X2 $11.6

Exam standard question – Hav & Strand (Cash and convertible bond)

Hav company offers a cash offer of $1·25 for each Strand Co share plus one $100 3% convertible bond for every $5 nominal value of Strand Co shares with par value is $0.25/share.

In the year six, the bond can be converted into 12 Hav Co shares or redeemed at par.

Existing share price of Strand the company is $4.76/share.

Required：

Calculate the percentage premium per share that Strand Co’s shareholders will receive under each acquisition payment method and justify, with explanations, which payment method would be most acceptable to them.

(3 marks)

Comment:

Cash offer	$1.25/share
Convertible Bond ($100/number of shares: $5/$0.25/share)	$5/share
Existing share price:	($4.76/share)
Gain=	$1.49/share
%= $1.49/share / $4.76/share=	31.3%

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