Mergers & Acquisitions - Essay Example

The earnings per share is 15.5p, which must be maintained. Therefore x/15.5 =8, hence x = 124p or 1 pound and 24 pence. This is the price of 1.24 pounds at which Smith plc may be valued for purpose of the merger if a P/E ratio of 8 must be achieved. On this basis, the average price of a share in a merged entity of both Amanda plc and Smith plc works out to {(1.24 + 2.40)/2} = 1.82 pounds, which is the market price that must be set for the share. In such a case, this would result in a lowering of the Amanda plc share value in the market by (2.40 – 1.82) = 0.

58 pence, while in the case of Smith plc share holders, the value of their stock rises by (1.82 -1.03) = 79 pence. Therefore, it may be noted that the second option appears to be the better choice, since it entails less losses for Amanda plc shareholders and more gains for Smith plc shareholders, in terms of share values. In order to assess the earnings on the shares that can be estimated while also maintaining some growth in the next three years, it may be noted that Amanda plc is currently on a growth track but will decline in the next three years, but for Smith plc future growth prospects look good but the limitation is finances.

The current rate of return on the Smith plc shares is (15.5 X 100/103) – 15%. On the basis of current earnings per share for Smith plc being 15.5 pence, if a growth rate of at least 15% is desired in 3 years with a desired rate of return of at least the current 15%, then the current fair market value should be at least 1.02 pounds. (ww.moneychimp.com). This is more or less the current value of the Smith plc stock (1.03 pounds) and a growth rate of 15% can be achieved although the PEG ratio is on the higher side.

The P/E ratio in this case will be 9.7 and the PEG ratio will be 0.64. On the other hand, if a growth rate of 30% is desired with a similar 15% rate of return on Smith plc stock, then the fair market value that must