ACCA Strategic Professional · Advanced Financial Management

Regulatory framework and processes: formula sheet

Full chapter guide

Key formulas

Offer value per target share (share exchange): Offer value = Exchange ratio × Bidder's share price; Exchange ratio is bidder shares offered per target share. The value moves as the bidder's price moves.
Offer value per target share (mixed offer): Offer value = Cash per share + (Exchange ratio × Bidder's share price); Use for cash plus share offers. State the date of the share price used.
Total consideration: Total consideration = Offer value per share × Number of target shares acquired; Use shares actually acquired when the bid is for less than 100%.
Premium offered: Premium % = (Offer price − Pre-bid market price) ÷ Pre-bid market price × 100; Use the undisturbed price from before the bid became known.
Shares needed for a given acceptance level: Shares needed = Acceptance % × Target shares in issue; Include shares the bidder already holds when testing a threshold.
Expected value of a deal under regulatory risk: Expected value = (P(clear) × value if cleared) + (P(remedies) × value after remedies) + (P(block) × value if blocked); Probabilities must add up to 1. Use this when the question gives probabilities for outcomes.
Value of synergies after remedies: Net synergy value = PV of synergies − PV of lost cash flows from divested units − costs of delay and regulatory process; Remedies reduce the benefits of the deal. Show the deduction clearly.
Cost of delay: Cost of delay = annual synergy benefit lost per year × years of delay (discounted if time is material); Delay also pushes synergies later, which lowers their present value.
Merger types and main concern: Horizontal = competitors (market power); Vertical = supply chain (foreclosure); Conglomerate = unrelated (little concern); Link the type of merger to the concern in every answer.
Shareholder test of a defence: Gain from defence = Final offer price (or value if bid fails) − Original offer price; A defence is good for shareholders only if the final price, or the share price after a failed bid, beats the original offer. Allow for costs.
Frustrating action rule (UK Takeover Code): Board action that could frustrate an offer needs shareholder approval in general meeting; Applies when the board has reason to believe a bid is imminent or an offer has been made. Actions under earlier obligations are treated differently.
Dilution from a poison pill: Bidder's % after trigger = Bidder's shares ÷ (Existing shares + New discounted shares issued to others); Use it to show why the bidder's stake and control fall sharply. The bidder is excluded from buying.
Value of target as the board's counter-argument: Value per share = Estimated equity value ÷ Number of shares; Use a DCF, P/E or asset value to argue the offer undervalues the company.
Value of a share offer: Offer value per target share = exchange ratio × acquirer share price; For example, 2 acquirer shares for 3 target shares gives a ratio of 2/3. Use the acquirer's current price unless told otherwise.
New shares issued: New shares = target shares × exchange ratio; Add these to the acquirer's existing shares to get the post-deal share count.
Post-deal EPS: EPS = (acquirer earnings + target earnings + post-tax synergies − post-tax cost of new finance) ÷ post-deal shares; For cash funded by debt, deduct interest × (1 − tax rate). For cash funded by a rights issue, add the new shares.
Gearing: Gearing = debt ÷ equity, or debt ÷ (debt + equity); Use the definition the question gives. Say which one you use. Use market values if available.
Gain to each party: Target gain = value received − pre-bid market value of the target. Acquirer gain = combined value after synergies − payment value − acquirer's pre-bid value; Synergy value is shared by the method and price of the offer. Check that the gains add up to the total synergy.
Post-deal share price (P/E method): Combined value = combined post-deal earnings × P/E assumed. Share price = combined value ÷ post-deal shares; State the P/E assumption clearly. Often the acquirer's P/E is assumed to hold, though the market may re-rate it.
Cash alternative equivalence: Cash per share that matches a share offer = exchange ratio × acquirer share price; Use this to compare the two offers on a like-for-like basis.

Quick revision

Takeover rules protect target shareholders and aim for fair, orderly bids.
Shareholders of the same class must be treated equally.
Target boards should not frustrate a bid without shareholder approval.
A mandatory offer arises once control passes the stated threshold in the code you studied.
Know the bid stages: approach, announcement, offer document, acceptance period, completion.
Offer terms cover price, form of consideration, conditions and acceptance levels.
Competition authorities can clear, require remedies, or block a merger.
Merger control can delay a bid, so timing and risk belong in your advice.
Defences can be pre-bid or post-bid, and each has costs and limits.
Cash gives certainty but may need debt or a cash raise; shares preserve cash but dilute control.
Mixed offers balance the bidder's funding needs against target shareholders' tax and risk preferences.
Always end with a reasoned recommendation tied to the scenario.

Common mistakes

Listing the bid stages generically without applying them to the scenario. Fix: Add a case fact to every stage, such as what due diligence should check in this target.
Treating due diligence as only a financial audit. Fix: Cover legal, tax, commercial, operational, environmental and people issues, and say how findings change price or terms.
Treating all mergers as equally risky for competition. Fix: State the type first. Horizontal deals carry the most risk; conglomerate deals the least.
Quoting specific market share thresholds or deadlines from memory. Fix: Use the figures in the scenario. Describe the process in general terms.
Listing every defence from memory without applying them to the scenario. Fix: Choose only the defences that fit the facts, such as the target's size or its funding capacity, and explain why.
Ignoring the frustrating action rule for post-bid tactics. Fix: State that in the UK, once a bid is expected or made, actions that could frustrate it need shareholder approval.
Forgetting to take tax off the interest on new debt when computing EPS. Fix: Always write interest × (1 − tax rate) as its own line. Do it before you add anything to earnings.
Valuing a share offer at the target's price or at the acquirer's old price rather than the acquirer's current price. Fix: Offer value = ratio × acquirer price. Check which price the question gives and say which you use.

Exam tips

Answer in the order of the timetable. It gives your answer a clear structure and earns marks for logic.
Always apply a point to the scenario. Generic stage lists earn few marks, and professional skills marks reward application.
Show the premium and offer value workings even if the question mostly asks for discussion.
Name the control thresholds, but use the figures given in the question if they differ from your memory.
If the question asks for advice, end with a clear recommendation and the main risk to it.
Name the merger type in your first sentence. It anchors the rest of the answer.
Use only the market data in the scenario. Do not invent shares, thresholds or deadlines.
Always link regulation to value: delay, remedies, lost synergies, price and conditions in the offer.