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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Hexa Co has 12 million shares at $9.00 and earnings of $9 million (P/E 12). It acquires Tera Co, which has earnings of $4 million, for 5 million new Hexa shares. Annual after-tax synergies of $1 million are expected, and the market is expected to keep the P/E at 12 on the combined entity. What is the expected post-merger share price and the gain per share to Hexa's existing shareholders versus $9.00?

Combined earnings are $14 million including synergies, spread over 17 million shares, giving EPS of about $0.8235. At a P/E of 12 the price is about $9.88, a gain of $0.88 over $9.00. Excluding the $1 million synergy would give only $9.18.

  1. A$8.47 so a loss of $0.53
  2. B$9.00 so no gain
  3. C$9.88 so a gain of $0.88Correct
  4. D$9.18 so a gain of $0.18

Explanation

Combined earnings = 9 + 4 + 1 = $14m. Shares = 17m. EPS = $0.8235. Price at P/E 12 = $9.88. Gain = $0.88 per share (the price is above $9.00). Without synergies: 13/17 x 12 = $9.18, which is the distractor omitting synergies. Hexa's holders are not harmed.

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