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exchange ratio

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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Solution Preview

Dear Student,

Thank you for using BM.
Below are my answers.


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.