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ACCA Strategic Professional · Advanced Financial Management · Acquisitions and mergers versus other growth strategies

Alpha has 10 million shares at $6.00 each, so its value is $60m. Beta has a value of $20m. Alpha expects the combined entity to be worth $86m because of synergies. Alpha will pay $24m in cash for 100% of Beta. Ignoring transaction costs, what is the net gain to Alpha's shareholders and the resulting value per Alpha share?

Alpha's shareholders gain $2m, taking the value per share to $6.20. Combined value of $86m less the $24m cash paid leaves $62m for 10 million shares, against $60m before. The synergy of $6m is shared with Beta's owners through the $4m premium paid.

  1. A$2m gain; $6.20 per shareCorrect
  2. B$6m gain; $6.60 per share
  3. C$4m gain; $6.40 per share
  4. D$2m gain; $6.00 per share

Explanation

Combined value is $86m, less $24m cash paid out, so Alpha's shareholders hold $62m. Original value was $60m, so the gain is $2m. Per share: $62m / 10m = $6.20. The $6m option is the synergy of $6m ($86m - $80m) and ignores the $4m premium paid; the $4m option wrongly treats the premium as the gain.

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