Okumkom Ltd has a current price of GH¢ 2.20p per share and a price / earnings ratio of 15. At present it has 10 million, GH¢1.00 ordinary shares issued. Okumkom Ltd is considering the takeover of Dasco Ltd. The current price of each of Dasco’s 4 million issued shares is 330p. Dasco’s price/earnings ratio is 10. Okumkom Ltd expects to be able to purchase the shares at their current price and will pay for them with an issue of its own shares valued at their current price.
Okumkom Ltd wishes to know how many shares to offer for each of Dasco Ltd’s shares, and the effect of the takeover on Okumkom Ltd’s reported earnings per share and share price.
Required:
Evaluate the favourability of this takeover and comment on your computations. (12 marks)
View Solution
Number of shares of Dasco Limited 4,000,000
Price per share of Dasco Limited ¢3.30
Value of Dasco Limited ¢3.3 x 4,000,000 = GH¢13,200,000
Number of shares to offer for Dasco Limited’s shares:
= (¢13,200,000/¢2.20) = 6,000,000 shares
For each of Vasco Limited’s shares, Okumkom Limited will offer:
= (¢6,000,000/¢4,000,000) = 1.5
That is 3 shares to be issued for 2 shares in Dasco Limited.
Effect of the takeover on Okumkom Limited’s EPS note P/E = 15
EPS of Okumkom Limited before takeover = (2.20/15) = 14.67 p
Earnings of Okumkom Limited before takeover
0.146 x 10,000,000 shares ¢1,467,000
Earnings of Dasco Limited = (330/10) x 4,000,000 ¢1,320,000
Combined earnings after takeover ¢2,787,000
Shares of Okumkom Limited before takeover 10,000,000
Shares issued to Dasco Limited’s shareholders 6,000,000
Total number of shares after takeover 16,000,000
EPS after takeover = (2,787,000/16,000,000) = 17.4 p
Share price of Okumkom Limited after takeover
P/E = 15
Price = 15 x 0.174 = 261p
Comments:
The takeover has been considerably favourable to Okumkom Limited because it has an improved Earnings Per Share as well as an enhanced share price by 2.73p and 41p respectively. The takeover has not been favourable to the shareholders of Dasco Limited in terms of the reduction in their EPS by 15.6p which is very substantial and also a reduction in the share price. The number of shares allotted to them might however compensate for the reduction as shown below.
Now, suppose a shareholder has 1,000 shares in Dasco Limited, the effect:
. GH¢
Value in Dasco Limited before 1,000 x ¢3.30 3,300
Value after takeover 1,500 x GH¢ 2.61 3,915
Increase in value 615
The shareholder will gain GH¢615 in value of his investment by the takeover.
The shareholders of Okumkom Ltd would suffer a dilution of control as a result of the takeover. They would be conceding 37.5% of their control to the shareholders of Dasco Ltd.