Calculate the total value of the synergy

Reference no: EM1361175

ABC plc is considering launching a takeover bid for XYZ plc. The two companies are in the industry and have identical cost of equity capital, which is 12% after tax.

Below is an extract of some financial data on both companies:

ABC plc XYZ plc

Earnings per share (eps) 50 pence 10 pence

Dividend per share (dps) 25 pence 5 pence

Price per share (pps) £9.00 75 pence

Number of shares 5 million 3 million

XYZ plc is expected to produce growth in dividend per share of 5% per annum to infinity with its current strategy and management. However, if ABC plc acquired XYZ plc, the resulting synergy from the acquisition would be such that the growth rate of dividend per share for XYZ plc can be raised to 8%. In addition, ABC plc is also confident that it can bootstrap the earnings of XYZ plc using its own higher P/E after the acquisition of the company.

The transaction costs of the acquisition, which covers payment to the investment banks and accountants advising ABC plc, are estimated to amount to £400,000.

Required:
a) Calculate the total value of the synergy that would be created from the combination of ABC plc and XYZ plc:
(i) using constant-growth dividend valuation model
(ii) using Price-earnings multiplier model
b) Comment on the limitations of the valuation models you have used in (a) above in the particular situation of this case scenario.
c) Explain the possible sources of synergy arising from the acquisition of XYZ plc by ABC plc.
d) If ABC plc paid £1.20 cash for each share of XYZ plc, what value of the synergy calculated in (a ii) above would be available to the shareholders of each company?
e) What are the advantages and disadvantages to ABC plc of paying cash to acquire XYZ plc?
f) Using two recent cases, discuss the ways in which UK companies, which have been the subject of unwanted (hostile or unfriendly) takeover bids defended themselves from such bids.

Reference no: EM1361175

Questions Cloud

Difference between defects and defectives in manufacturing : describe the differences between defects and defectives in manufacturing and Also, be sure to provide examples.

Draw a erd model a manufacturing company : Draw a ERD model A manufacturing company has several assembly plants in different cities. Each plant produces one product which requires certain parts in its assembly.

Explain and discuss the three lessons learned you are most : Explain and Discuss the three lessons learned you are most likely to apply in your future career as a business person

What one charging the lower price earns : If you each charge a high price, you each earn profits of $200. If you charge different prices, the one charging the higher price loses $50 and the one charging the lower price earns $300.

Calculate the total value of the synergy : ABC Corporation is planning launching a takeover bid for XYZ plc. The two companies are in the industry and have identical cost of equity capital, which is 12 percent after tax.

Professional and productive work environment : Professional and productive work environment - How will I manage these relationships to insure a professional and productive work environment?

Determine at least three business rules for skate shop : Determine at least 3 business rules for the Skate Shop, and update the relationship diagrams with the constraints. You do not have to complete a business rule.

Find the magnitude of the average acceleration : make sure to label the graphs with units and values to indicate any critical points of the ball's motion.

Scientific research process-school of health science : Identify a problem in your area of Health Science that you might like to study using a scientific research process. Identify an area of in the School of Health Science

User Account

All Pages