Question

Question 3 [10 Marks] Use the following information to answer questions 3.1 to 3.3:

Links Ltd., a logistics company, is considering buying a smaller competitor in the same industry it operates in. The competitor, Smartmove Ltd., is a more technologically advanced, but resource limited, company. The management of Links Ltd. feels that the company could incorporate the technology Smartmove Ltd. has developed to realise significant cost savings and better their customer experience and therefore increase revenue. The potential customer base acquired from Smartmove Ltd. would be inconsequential to a company of Links. Ltd.’s size and does not factor into the decision. Links Ltd. wants to acquire 100% of the outstanding shares of Smartmove Ltd. given the sensitivity of the technology to its business competiveness. Links Ltd. plans to use an issue of shares to fund the acquisition. Links. Ltd. has 100m shares in issue currently trading at R10 apiece and EPS of R1.00 while Smartmove Ltd. has 10m shares in issue trading at R1 apiece with EPS of R0.10. Synergistic earnings of R5m per year is expected post the merger.

Question 3.1 (1 Mark)

Is the merger a) horizontal, b) vertical or c) conglomerate in nature? Fill in only the letter on the space on the template please.

Question 3.2

What do you think is the reason for the merger? Please keep your answer limited to one sentence.

Question 3.3

Help to advise the management of Links Ltd. on their potential offer that they can make by doing the following: i. Determine the maximum exchange ratio based on an EPS valuation that Links Ltd. can offer without diluting its EPS, taking synergistic benefits into account. ii. Calculate the exchange ratio based on market values. iii. Determine the market premium if Links Ltd. makes an offer in line with the maximum exchange ratio determined from EPS and synergistic benefits.

Answer 1

3.1

It is an horizontal merger ince both the companies operate in same industry and provide same like services.

3.2

The main reason of merger is to obtain synergy benfits from the technology of smart move Ltd

3.3

Exhange ratio on EPS

Swap ration =Earnings of Link +Synergy benefits/ Eranings of smart move

=100*1+5/10*0.10

=105:1

Exhange ratio on MPS

=100*10+5/10*1

=100.5:1

If Exchange ration is lined with EPS

Therefore, 105:1 ratio is used

Threfore shares issued are 105*10 =1050 Millions