Links Ltd., a logistics company, is considering buying a smaller competitor in the same industry it operates in. The competitor, Smartmove Ltd., is a more technologically advanced, but resource-limited, company. The management of B Links Ltd. feels that the company could incorporate the technology Smartmove Ltd. has developed to realise significant cost savings and better their customer experience and therefore increase revenue. The potential customer base acquired from Smartmove Ltd. would be inconsequential to a company of Links. Ltd.’s size and does not factor into the decision. Links Ltd. wants to acquire 100% of the outstanding shares of Smartmove Ltd. given the sensitivity of the technology to its business competitiveness. Links Ltd. plans to use an issue of shares to fund the acquisition. Links. Ltd. has 100m shares in issue currently trading at R10 apiece and EPS of R1.00 while Smartmove Ltd. has 10m shares in issue trading at R1 apiece with EPS of R0.10. Synergistic earnings of R5 per year are expected to post the merger.
Question
Which type of merger is presented by the case above?
Solution
Horizontal mergers. These result when two firms in the same industry merge.
Question
Determine the maximum exchange ratio based on an EPS valuation that Links Ltd. can offer without diluting its EPS, taking synergistic benefits into account, and choose the nearest option below.
Solution
