1a.(i)  if S. plc and A. plc decide to merge where shares of A will be issues for exchange of shares of S using the current market prices and  price earning ratio of 8 it will have a number of effects. The effects on the value of their shares for each alternative will be as follows.

Valuation using current market prices.

If the current market prices are used, the formula will be number of shares X the market value.

The value of S. plc shares will be = 1,064,000  x 1.03 = £1,095,920.

The value of A. plc shares will be  = 800,000 X 2.40= £1,920,000.

If the market prices are used in issuing the prices, shareholders of S . plc limited will be issued with 456633 shares of A. and this will be arrived using the following formula.

Number of shares of S x market price of S   = 1064000 x 1.03   = 456633

Market price of A                              2.4

The total earnings for the company will be £165,000 + £239,000 = £404,000.

Earnings per share will be £404,000             = 32p per share after the merger.

(800,000 + 456,633)

After the merger earning per share will be higher than both firms has before because the number of shares issued in exchange for the shares of S were too little because of the market prices difference. This is why the earning per share after the merger has gone up and it is shown as calculated above.

Therefore it goes that whenever there is use of market price win valuing the share then the earnings per share of the acquiring firm will be greater and the effective earnings for both original holders’ increases. The long term effect will depend on the growth rate of the two companies and in this case we are not given the growth rate of the company therefore it is not easy to state the long term effect in merging these two companies. However the short term effect has been explained. The market price per share or the valuation of the company will also be affected as follows.

Market price will be equal to £2.4

Earning per share will be equal to 32p per share.

This is temporary because the price will be determined by the market forces. The assumption here is since the market price has been used in valuation, it will remain constant and the rest will remain to be adjusted by the market forces due to delusion of ownership, changes in financial and managerial decisions, changes in expected  earnings and changes in business and financial risk.

Using the market price ratio the effect will be seen and the market price ratio is calculated as follows.

Earnings available for common stock                                   £404000

Number of outstanding shares                                             1256633

Earnings per shares                                                                32p

Market price per share                                                           £2.4

The value of the company after the merger will be £2.4 X 1,256,633 = 3,015,919.

The valuation remains constant as at before merger that is the two market values of the companies combined.

Valuation using earnings per share.

If they decide to use valuation of 8, price earning ratio in determining the number of shares that will be issued to S it will be as follows.

The market price of A,S shares will be determined to be 8 X 15.5p which will be 1.2. Therefore the exchange ratio will be 1,064,000

1.24

Relationship between P/E paid and P/E of acquiring company

P/E paid > P/E of acquiring company           decrease                      increase

P/E paid = P/E of acquiring company           constant                      constant

P/E paid < P/E of acquiring company           increase                       decrease

ii. There are a number of factors that will influence the choice of price earning ratio that will be used in the valuation in this case. These factors include

–          the effects of the merger on earnings

–          the effects of the merger or the market price of the share

–          the growth rate of the companies involved

–          Risk spreading and reduction in terms of profitability and the expected synergies.

b. i. in a take of a bid the company that wants to take over another one is required to bid and apply to the regulatory body. In a merger the two companies agree to come together in order to take advantage of the synergies that are associated with coming together. The main difference in the two cases is the method of agreement. Take over’s always issues statements if claims are made against the merging. There is also a show of evaluation of the assets of the company that is just about to be overtaken. When these kinds of tactics are used, that will be taken over. A merger is an agreement of the company.

B ii . Chen plc can offer a £1.60 per share because S has a good growth rate in the market and the management has indicated that in the next three years they will be competitive in the market upon expansion. Therefore the excess of the valuation will be good will for the company management. If Chen calculates and finds that the Earnings of S will help the company grow in terms of earnings per share they will offer a price of 1.6.

iii. shareholders

S. plc

Report on stakeholders / mergers

Executive summary

After analysis of the merging prospects between our company and A plc as well as a cash offer of 1.60 price per share, I find that the two methods used in the merging between A company limited and S does not offer good returns. However there is a long term benefit to our shareholders. The cash offer will be final payment to our shareholders.

Introduction.

This is an analysis of merging prospects between our company and A. plc limited as well as an offer to purchase our shares  at a price of 1.60by  accompany called Chen plc.

Merger.

There are two methods of merging our company with A. plc. The first method is to use stock market prices and a merger using price earning ratio of 8.0. these has been discussed in (a) above.

Cash price.

Chen plc has offered a cash price of 1.6. the cash offer will mean that the shareholders will not have any future interest in the dividends of the company. Cash offer will only give the share holders money for consumption.

The acquisitions arising  gives the acquirers a competitive edge over the other companies in the industry. The price elasticity in the products in the industry triggers a more than proportionate demand, Because acquisitions lead to a reduction in operating costs, costs of equipments, reduced labour costs, etc, the companies may be  able to reduce the price of the products and be able to operate profitably. It can therefore be summarized that an acquisition offers the enterprises an opportunity to capitalize on the responsiveness of their customers to prices changes which are direct consequence of acquisitions (and mergers).

Acquisitions offer the companies a good opportunity to make use of technology in the market.  Another benefit arising from acquisitions is that the combined entities would have a stronger market power/ share. The resulting in more investors in the company which shall be the Linchpin for the growth of the company.

Internal growth is a slow process of growth. Internal growth may deplete a company’s resources and even affect its liquidity position; owing to the massive resources that would be required. If a company intends to place reliance on internal growth as opposed to external like acquisitions, chances are that it might be overtaken by those companies which have embraced acquisitions as a form of growth. Internal growth is also barred from becoming a success due to an agency of conflict inherent in the management. Management may undertake projects which are only profitable in the short – run to benefit from them only during their period in office. A single firm may also not be having a well competent staff to push through the growth process. But acquisitions inject  new blood of management into the team that would steer growth of the group company. Together with other related benefits such as reduced operating costs and other economies of scale associated with acquisitions, the process of growth is enhanced compared to internal growth.

In my opinion our company should merge with A. plc using the market price as  a target in order to ensure that there is our influence of learning in day to day affairs of our company. At the same time we shall remain enjoying dividends for year to come.

2. Why mergers fail

Mergers and acquisitions have resulted in economies of scale and synergistic effects for companies. Increased market share, greater performance in the stock market and customer satisfaction are just but some of the benefits of such combinations. However challenges are also associated with mergers and acquisitions are many. The benefit may be domination of the market and other synergistic effects like in waste management. However the merger led to jobs being lost. The firms should also focus on the importance of ethical and cultural fits between them as this may either make the acquisition/ merger successful or a complete failure.  Some of the factors that may contribute to failure include;

Lack of post –acquisition integration planning.

One of the problems encountered by most firms after an acquisition is incompatibility of the investor company and the investee (acquiree). And this incompatibility is from many areas of perspective. The policies, rules and procedures governing the new enterprise are different and reconciling them often meets resistance especially from the members of staff. As one company can view a given area of social responsibility as beneficial to the organization, another would see it as a cost to the group.  The acquired company also suffers as a result of policies that are imposed on it by the acquirer. These range from – adapting of certain specific processing methods and production techniques

Another post – acquisition problem is that of little or no co-operation at all between the acquirer and the acquired company. Mostly, the management of the investor company tends to intimidate those of the acquired company in among other areas, the decision – making process. The two firms also suffer from the changes that are usually accompanied with acquisitions: These are organizational structure adjustments, changes to rules, policies, regulations and procedures. After an acquisition, the top management teams has to change with people losing their previous top positions, employees need to be retrained on new production methods and the marketers have to change  to other new marketing methods. All these changes normally take a considerable time to be embraced and performance during such a transition period is likely to decline.

With an acquisition, there is also the danger that the acquired company may be having certain pending legal suits. The presence of these suits would neutralize the benefits that could be derived from an acquisition. Many companies find themselves in difficult legal tussles after an acquisition has taken place. Instead of the planned acquisition becoming progressive, it in fact becomes a retrogressive exercise

Management attitude and Poor management and management practices in the target

The attitude of the management towards the merger will determine the success or failure of this merger. If the management is not accepting this merger it is likely to fail.  The main causes of mergers failures are mismanagement due to un acceptance. This accounts for big percentage in business merger failures. Numerous specific managerial faults can cause the merger to fail. This can be due  poor financial advice, a poor sales force, and high production costs are the types of factors that may result in the ultimate failure of the merger firm.

Economic activity and Lack of knowledge by the bidder of the target and its industry

Economic activity especially economic downturns – can contribute to the failure of a merger between firms. If the economy goes into a recession, the firms’ sales may decrease abruptly, leaving it with a high fixed costs and insufficient revenues to cover these fixed operating and financial outlays. If the recession is prolonged, the likelihood of survival decreases.

Each industry can be viewed as operating in its own micro economy. Although the national economy may be doing well, the industry in which the firm operates may be in a slump and firms in the industry are generally heightened. Increased competition is often a key cause of business failures during recession. The failure of a firm during economic boom, on the other hand, is probably attributed to lack of knowledge of the industry by the acquiring firm.

Little or no experience of the bidder management in acquiring other business

Since a firm is generally organized in the hierarchical form, the top manager, president, and board, of directors all must share the responsibility for the board of directors to monitor the presidents’ activities, and of course, the top managers normally report to the firms president. Each of these parties therefore contributes to the firms overall success or failure. Since all major corporate decisions are eventually measured in terms of dollars, the financial manager may play a key role in avoiding or causing a business failure. It is his role to keep in touch with the firms’ financial pulse.

Magnification of losses.

Both earnings and losses are magnified. The magnification of losses when general economic conditions are unfavorable may result in the collapse of the holding company. The degree of risk is to some extent a function of the degree of pyramiding and the general stability of the merged’s earnings.

References

Ghetti A. (2008); Terrific introduction to financial management; Amazon

Newbery, David M and Michael G Pollitt (1997): ‘The Restructuring and Privatization of the UK Electricity Supply-Was it Worth It?’, Public Policy for the Private Sector, No 124, World Bank.

McCarthy G.D. (1996); Acquisition and mergers

Reid S.R. (1999); Mergers, managers and the economy; McGraw-Hill, New York.

Thomas Stephen (2005) ‘British Experience of Electricity Liberalization: A Model for India?, Economic and Political Weekly, Vol XL No 50, December 10-16, 2005.

Winger and Frasca Personal Finance An Integrated Planning Approach, Pearson