Mei 601 Mergers And Acquisitions Kitengela Campus Question Paper
Mei 601 Mergers And Acquisitions Kitengela Campus
Course:Master Of Business Administration In Corporate Management
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTER OF SCIENCE COMMERCE (MSC)
ECONOMICS AND INVESTMENT
MEI 601 MERGERS AND ACQUISITIONS KITENGELA CAMPUS
DATE: AUGUST 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and any other THREE questions
QUESTION ONE (31 marks)
Buyer Corporation and Target Corporation are both public companies whose common shares
are traded on the New York Stock Exchange. Neither company currently owns any of the stock
of the other. Neither is an investment company. Buyer is incorporated in a state. The boards of
directors of Buyer and Target have agreed to a triangular merger. Merger Sub, a wholly-owned
subsidiary of Buyer, will merge into Target, with Target being the surviving company. Target’s
articles of incorporation will not be amended in the merger. Buyer will receive Target common
stock for its Merger Sub shares (about 10% of the amount of Target common stock outstanding
before the merger). Target’s shareholders will receive two non-voting preferred shares of Target
for each Target common share they currently own. After the merger, neither Target’s common
shares nor its preferred shares will be traded on the New York Stock Exchange or any other
organized market.
Required:
a. Explain whether Target’s shareholders should approve the merger.
(10 Marks)
b. Explain any three types of synergies likely to occur from the merger.
(12 Marks)
c. Explain any three factors to consider in evaluating whether to acquire the Target
Corporation.
(9 Marks)
1
QUESTION TWO (23MARKS)
Using clear examples discuss the following methods of target valuation in mergers and
acquisitions.
a. Net Assets Valuation method (7 Marks)
b. Present value method (8 Marks)
c. Earnings basis valuation method (8 Marks)
QUESTION THREE (23 MARKS)
Bara Ltd. is contemplating a bid for the share capital of Pwani Ltd. with an intention of buying
the whole company. The following data for the two companies have been provided.
Bara Ltd. Pwani Ltd.
Number of shares 3,000,000 8,000,000
Share price Sh. 150 Sh. 30
Latest equity earnings Sh. 675 million Sh. 80 million
After acquisition, Bara Ltd. intends to sell a division of Pwani Ltd. which accounts for Sh.20
million annually in equity earnings. The division does not form part of the core business of the
intended group. The division has a current market price of Sh. 50 million.
Bara Ltd.’s management believes that by introducing better management, earnings of Pwani Ltd.
could be permanently increased by 25% although the price/earnings multiple will remain the
same. To avoid duplication, some of Bara Ltd.’s own property could be disposed of at an
estimated price of Sh. 130 million. Rationalisation costs are estimated at Sh. 100 million, these
comprise retrenchment and legal costs among others.
Required:
(a) Highlight the advantages of growth by acquisition.
(8 Marks)
(b) Calculate the effect on the current share price of each company, all other things being
equal, of a two for ten share offer by Bara Ltd., assuming that Bara Ltd.’s estimates are in
line with those of the market.
(10 Marks)
2
(c)
Assume that Bara Ltd. is proposing to offer Pwani Ltd’s shareholders the choice of a two
for ten share exchange or a cash alternative. Giving reasons, advise Bara Ltd. whether
the cash alternative should be more or less that the current value of the share exchange.
(5 Marks)
QUESTION FOUR (23 MARKS)
a.
Mention and explain indicators of a possible target in mergers and acquisitions
(15 Marks)
b.
With reference to mergers and acquisitions explain the concept of due diligence
(8 Marks)
QUESTION FIVE (23 MARKS)
a.
Explain the following steps of mergers and acquisition process
i) ii) Search and screen target
iii) Investigation and valuation of the target
iv)
b.
Pre-acquisition review
Negotiation and settlement
(14 Marks)
In the post-merger integration process explain the three levels of integration. (9 Marks)
QUESTION SIX (23 MARKS)
Mergers and acquisitions have in the past failed to achieve synergy.
a. Distinguish between mergers and acquisitions. (3 Marks)
b. Discuss the reasons why mergers fail to achieve synergy. (10 Marks)
c. Suggest ways in which a merger can achieve synergy. (10 Marks)
3
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