Identify the type of the planned acquisition

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Reference no: EM132020202

The financial performance of springs ltd; a telecommunication company, has improved tremendously in the past five years. The sales have grown by 30% while cash flow has grown by 42.6% over the period .The management of the company largely attributes this improved performance to managerial efficiencies and adoption Of high technology in the operations of the company .in order to take advantage of the excess cash flows generated, the management of springs is considering acquiring Niche ltd ,the board of directors of springs ltd has requested the financial manager of the company to determine the expected cash flows expected to be generated by niche ltd over the next 5 years. As part of due diligence, the financial manager has come up with the following projected information relating to Niche ltd

Projected cash flows in ksh.”000”

2017 2018 2019 2020 2021

Net sales 1050 1260 1510 1740 1910

Cost of sales 735 882 1057 1218 1337

Selling and admin expenses 100 120 130 150 160

Interest expenses 40 50 70 90 110

The finance manager also expect the cash flows available to springs ltd from niche ltd to grow by 8% per annum in perpetuity and niche ltd to continue retaining 40,000 for internal expansion every year ..the finance manager has also gathered the following current information to the two companies

Springs ltd niche ltd

Present earnings 20,000,000 6 000 000

No of shares 6 000 000 2 000 000

Earnings per share 3.33 3.00

Market price per share 60 30

Price /earnings ratio 18 10

It is the opinion of the finance manager that the best offer of springs ltd to niche is 0.667 shares for each share of niche ltd

Required

Identify the type of the planned acquisition in the above case and outline any three advantages that might accrue to springs ltd out of such combination

Outline the process spring ltd will require to go through if the acquisition is to be successful

Determine the combined effect of the acquisition of niche ltd by springs ltd on; total earnings; number of shares, earning per share and market price per share given that the price earnings ratio remain 18 as a financial analyst; advice the board of directors of springs ltd on the maximum amount they should pay for acquision of niche ltd given that the prevailing tax rate is 30% and that cost of capital applicable to niche ltd is 10% explain any four defensive mechanisms that the management of niche ltd may undertake to avoid such overs.

Reference no: EM132020202

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