AFM Acquisitions and mergers

A target has annual earnings of $5m. An acquirer values it on its own price earnings ratio of 12. The value is:

• 1 $5m
• 2 $12m
• 3 $60m
• 4 $17m

Which of the following is a common reason for a bid to fail to create value for the acquirer's shareholders?

• 1 Paying a premium that is higher than the value of synergies
• 2 Buying a business in the same sector
• 3 Doing proper due diligence
• 4 Having a clear integration plan

Synergy of $10m a year in perpetuity, discounted at 10 percent, has a present value of:

• 1 $10m
• 2 $100m
• 3 $1m
• 4 $110m

A target is worth $80m alone. Synergies are worth $20m and the offer price is $90m. The gain to the acquirer's shareholders is:

• 1 $20m
• 2 $30m
• 3 $10m
• 4 -$10m

A takeover in which the bidder offers its own shares in exchange for the target's shares is a:

• 1 Management buyout
• 2 Cash offer
• 3 Demerger
• 4 Share for share offer

A defence used by a target to avoid a hostile bid by persuading shareholders that the offer undervalues the company is:

• 1 A defence document argument based on value and prospects
• 2 A poison pill only
• 3 A white knight bid only
• 4 A Pac-Man defence

Earnings per share after a share for share acquisition may fall if:

• 1 Synergies are large
• 2 The acquirer has a high P/E
• 3 The acquirer's P/E is lower than the price paid in earnings terms
• 4 The target has high earnings