Question

T-com is an industrial conglomerate that work in numerous sectors, including, steel products and trading to mechanical and electrical engineering, automotive and telecommunications. In 2018, it has acquired Beta Co., multinational a telecommunication company. The acquisition costed $971 Million and it was made for cash. It has resulted in $270 Million cost reduction per year. Assume that the values of both T-com and Beta Co. before acquisition were $12.5 Billion and $5.3 Billion respectively and that the opportunity cost of capital is 12%.

1- WHAT IS THE TYPE OF THIS COMBINATION ?

2- WHAT IS THE GAIN FROM THIS ACQUISITION ?

3- HOW MUCH CASH MONEY WAS PAID BY T-COM TO BETA CO. ?

4- IF T-COM HAD PAID $50 IN CASH FOR EVERY SHARE TO BETA CO. HOW MANY SHARES HAD BETA CO. BEFORE THE ACQUISITION ?

5- WHAT IS THE NET PRESENT VALUE ( NPV ) OF THIS ACQUISITION ?

Answer 1

Answer:

1) The type of this combination can be classified under horizontal combination as both the companies carries the same business at one point i.e telecommunication services.

2) Gain from this acquisition: Annual cost savings / opportunity cost of capital

= 270 Million $ / 12%

= 2,250 Million $ or 2.25 Billion $

3) A cash money of 971 Million $ was paid and value of company is 5.3 Billion $

= 971 Million $ +5.3 Billion $

= 6.271 Billion $

4)IF T-COM HAD PAID $50 IN CASH FOR EVERY SHARE TO BETA CO. HOW MANY SHARES HAD BETA CO. BEFORE THE ACQUISITION::

Amount paid: 6.271 Billion $ / 50$

=125.42 Million shares

5) Net present value of company:

Gain on acquisition - cost of acquisition

= 2.25 Billion $ - 971 Million $

= 1.279 Billion $

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