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Agrico is considering the acquisition of Thompson. Agrico has two million shares outstanding selling at R30, or 7.5 times its earnings per share, and Thompson has one million shares outstanding selling at R15, or five times its earnings per share. Agrico would offer to exchange two shares of Thompson for one share of Agrico.
Problem 1: If there would be no wealth created from the merger, what would be the earnings per share of the merged company? Its price-to-earnings (P/E) ratio? Its share price? Would there be any wealth transfer between the shareholders of the two companies?
Problem 2: Suppose that, after the merger, the market would not adjust the P/E ratio of Agrico, which will stay at 7.5. What would be the new share price of the merged company? Would there be any wealth transfer between the shareholders of the two companies?
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