Analysis of the acquisition of Delta Plc
This report provides an evaluation and analysis of the acquisition of Delta Plc (The Target Public Limited Company) by Alpha Plc (The Acquirer Public Limited Company). Methods of evaluation and analysis in this report include focusing benefits of different alternative offers proposed by Acquirer Company to Target Company to acquire in cheapest way. Other calculations include; The evaluation and analysis conducted in this report has limitations. Some of the limitations include: it is not mentioned that how many shares Alpha Plc is going to acquire from Delta Plc, in this report it is assumed that Alpha Plc se acquiring 100% shares.
Financial performance figures in terms of Revenue, Gross Profit, Net Profit are not provided not the nature of company is known whether each company relates to same industry or not, it is assumed that both companies are in the same industry. Introduction: With the rising trend of expansion of industry in the world, it is becoming essential for companies in each industry sector to expand either by huge investment (expansion process is slow in this case) or by acquiring another company in the same industry (expansion is much quicker).
It is in the opinion of experts that “It’s quite simple–the way
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Growth through acquisition, too often considered the exclusive domain of the largest of companies, is also quite appropriate for the small and midsize company looking to achieve rapid expansion” (David T. Annis, 2009). Alpha Plc is “The Acquirer Company” and Delta Plc is “The Target Company” in this report. The aim of this report is to analyze various options offered by Acquirer company to Target Company which are in negotiation process between Alpha Plc and Delta plc. Acquirer Company proposed three offers to Target Company which are mentioned later in this report.
A description of the each offer and an analysis and calculation for each offer are followed by a comparison of the three offers. Finally, the most beneficial and cost efficient offer incase of Acquirer company and Delta company is recommended. A confident acquirer will tend to pay consideration for the acquisition of target company by cash and the stock markets historically in past have been encouraging this. Resultantly, share value rises in response to this confidence. While purchase consideration in the form of stock (which is quite often) results in different response if any sense is developed that the Acquirer’s stock is overvalued.
More oftenly in many cases, When the deal is announced officially in financial market, the stock value of Acquirer takes a dip as it’s a common slogan in stock markets that “buy on rumors and sale on news”. But the cash consideration makes sure that target company’s shareholders’ do not give up any merger gains to the acquired companies’ shareholders. Issuing 12 million shares of Alpha Plc whose stock price is i?? 15 per share resulting issuing shares valuing i?? 180 million and 30 million shares of Delta Plc acquired at i?? 6 per share resulting i?? 180 million cash paid, making consideration i??
360 million in total. It is witnessed that purchase consideration in each case is i?? 360 million. But the finance manager would definitely be concerned to withhold its current assets i. e. cash and issue stocks instead because huge cash outflow may result increased finance cost to the acquirer which may negatively impact the financial performance of the acquirer in short term. It is assumed that Alpha Plc is confident that the merger will result in economies of scale with a Net Present Value (NPV) of i?? 90 million, so finance manager may consider stock option.
Before we analyze acquirer’s gain synergy as a benefit of acquisition is best explained as “The benefits realized in a strategic acquisition are largely a result of synergies and economies of scale. Concept of Synergies (Can 2 + 2 = 5? ) In a well executed acquisition, the acquiring company can take advantage of synergies. That is, the two companies together will be stronger and more profitable than either company was previously. Synergy is roughly defined as two or more things together being better or more effective than the sum of their parts.
As it’s used here, it means two or more companies merging such that the combined resources of the merged unit have more than the sum of the value they had individually. For example, suppose XYZ Engineering Company has very skilled sales and marketing people. Through their marketing abilities they have a number of contracts for sophisticated engineering projects. However, their engineering staff leaves something to be desired. The engineers are inexperienced and are not well equipped to handle the contracts that XYZ sales personnel are able to secure. (Gary L. Schine, 2009)”