Reference no: EM133110931

Stock market booms and merger waves are both driven by increases in optimism in financial markets. This is driven by managerial discretion and overvaluation that claim that merger waves are driven by market optimism. Empirical support for the managerial theory is provided by evidence that the amounts of assets acquired increase as optimism in financial markets increases and that the returns to acquiring companies are inversely related to market optimism at the time of mergers.

Since the Covid-19 outbreak, rubber glove makers stocks have by far been the clear outperformers on Bursa Malaysia. The market rallies were largely fuelled by global shortages of rubber gloves. Shares of rubber glove makers were chased by institutional investors and retailers, as they were seen as beneficiaries of the pandemic amid strong sales and severe undersupply.A beneficiary of the bull run has been Super Glove Berhad which now has accumulated large cash reserves and would like to expand into another promising area, financial technology. Super Glove Berhad has earnings per share of RM 4.00. It has 1 million shares outstanding, each of which has a price of RM 40.00. The management is thinking of buying Hyper Fintech, which has earnings per share of RM 2.00, 1 million shares outstanding, and a price per share of RM 25.00. The management will pay for Hyper Fintech by issuing new shares. Super Glove and Hyper Fintech are in totally different industries. There are no expected synergies from the transaction.

a. Diversification is good for shareholders. Rationalise whether should managers acquire firms in different industries to diversify a company?

b. Evaluate the acquisition of Hyper Fintech by Super Glove in terms of impact to respective shareholders' wealth.

c. Compute the earnings per share of Super Glove Berhad after the merger if it pays no premiumto acquire Hyper Fintech.

d. Rationalise the change in earnings per share and its impact on shareholders.