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Mergers and Acquisitions

1. Can-Dee-Con is an established national building company. The firm has concentrated its activities in building residual units.

2. Alu City is a manufacturer of aluminum products for the building industry and has experienced a high growth rate due to an increased demand. The company shares are currently being traded at 410cents per share. The authorized share capital is four million ordinary shares with a par value of R1.00 per share.

The company has issued two million shares. Alu City's current EPS is 90cents and dividend is 36 cents per share.EPS is expected to maintain a constant growth of 20% per annum.
The management of Can-Dee-Con sees an opportunity to reduce costs and increase profits through a merger with Alu City. Aluminum products would be supplied directly to Can-Dee-Con, thereby saving distribution and handling costs.
Alu City would also be able to achieve improved production planning.

Savings due to the merger are expected to be R6 million.
Can-Dee-Con current EPS is 225 cents. The company follows a dividend policy of 40% of EPS. Its current share price is trading at 820 cents. There are 8 million shares in issue. Management expects the company to maintain the same average growth rate of 10% as the past years.

Can-Dee-Con shareholders regard earnings per share as important and prefer not to suffer dilution in EPS due to the merger. The proposed merger will be completed through the issue of shares by Can-Dee-Con to Alu City.

1. Calculate the exchange ratio based on current earnings per share. Will the shareholders of Can-Dee-Con be satisfied with new EPS?
2. What would the exchange ratio be, if the given growth rates were assumed to occur for only the next five years? How many shares would Can-Dee-Con need to issue in this case.
3. Calculate the post-merger EPS, if the merger terms are based on market values per share. What are the benefits to the respective shareholders?
4. Calculate the dividend a shareholder of Alu City will receive if he had previously held 100 shares, based on the following information:
4.1 exchange ratio based on EPS
4.2 exchange ratio based on growth of EPS
4.3 exchange ratio based on market values

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Required 1
Can-Dee-Con EPS/Alu City EPS = 225 cents/90 cents = 2.50
2.50 shares of Alu City will be exchanged for 1 share of Can-Dee-Con

Total common stock outstanding after merger = 8 million + (2 million/2.5) = 8,800,000 shares
New EPS = [(225 cents x 8 million) + (90 cents x 2 million)]/ 8,800,000 shares = 225 cents

Yes, Can-Dee-Con shareholders will be satisfied as post merger EPS is ...

Solution Summary

The exchange ratio within this case is calculated.

See Also This Related BrainMass Solution

International accounting: which foreign exchange rates to use; MBI acquisition?

1. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations which do you favor? Why? Is your view the same when you add local inflation to the budgeting process?

2. You are the CFO of Marisa corporation a major electronics manufacture head quartered in Shelton, Connecticut. To date your company's operations have been confined to the US and you are interested in diversifying your operations overseas. On option would be to begin establishing wholly owned subsidiaries in Europe and South America and Asia. Another option is to acquire a multinational company that already has a major international presence you are leaning toward the latter course of action as you are interested in diversifying your company's operation risk and enhancing its bottom line as soon as possible. You also have significant stock option package and will benefit greatly if the price of Marissa Corporation's common stock were to rise over the next year.

You are particularly interest in MBI International, as US based multinational with operations in a significant number of countries. You estimate that approximately 60% of the company' earnings are from abroad. Foreign operations performance statistics, provided in MBI corporation's consolidated financial statements are included in Exhibit 10-13 for the years 2004-2003 and 2002. Relevant notes are also appended.

Unfortunately MBI does not disclose data explaining the movement of the major currencies in which it conducts its business. You do a Google search and uncover a trade weighted index supplied by the US government. Given MBI's large scale operations you decide to use the trade weighted index as a proxy for MBI's currency experience (see exhibit 10-14). (In using such a proxy you are assuming that the currency mix of MBI's activities parallel the currency mix in the trade weighted index)

Required On the basis of the information provided does MBI represent an attractive acquisition candidate?

(See attached file for charts)

Notes non US subsidiaries that operate in a local currency environment account for about 90% of the company's non US revenue. The remaining 10% of the company's non US revenue is from subsidiaries and branches that operate in the US dollar area or whose economic environments are highly inflationary.

AS the value of the dollar weakens net assets recorded in local currencies translate into more US dollars than they would have at the previous year's rates. Conversely as the dollar becomes stronger net assets recorded in local currencies translate in fewer US dollars than they would have at the previous year's rates. The translation adjustments resulting from the translation of net assets amounted to $3,277 million at December 31, 2004, $1,698 million at December 31, 2003 and $1,917 million at December 31, 2002. The changes in translation adjustments since the end of 2002 are a reflection of the strengthening of the dollar in 2003 and the weakening of the dollar in 2004

Exhibit 10-14 Dollars trade weighted exchange index 2002-2004
2002-2004 (1990=100)

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