Mergers and acquisitions have become popular in corporate finance. Explain five (5) of the reasons given by corporate executives to justify their involvement in Mergers and Acquisitions.
Company ABC intends to take over XYZ. One of the arguments propounded by the CEO of ABC is that it intends to undertake the merger as a means of diversification to reduce risk. The present value of ABC is given as GH¢300 million. The present value of company XYZ on the other hand is GH¢80 million. It is estimated that due to the merger annual savings of GH¢6 million will be made. After several rounds of negotiation, ABC has agreed to pay a price of GH¢120 million for XYZ. Assume a post-merger cost of capital of 10%.
Calculate the cost of the merger to ABC
Calculate the NPV of the merger to ABC
What will be the gain to the shareholders of XYZ?
Determine the total value of this company assuming the merger takes place
Comment on the argument propounded by the CEO of ABC.