Alpha plc, a dynamic, fast-growing business in microelectronics, has just made a bid of 17 of its own shares for every 20 shares of Beta plc, which manufactures a range of electric motors.

Financial statements for the two businesses are as follows:

The merger of the two businesses will result in post-tax savings of £15,000 per year to be made in the distribution system of Alpha plc.

One of the shareholders of Beta plc has queried the bid and has raised the following points. First, he understands that Alpha plc normally pays only small dividends and that his dividend per share will decrease. Second, he is concerned that the bid undervalues Beta plc since the current value of the bid is less than the figure for shareholders’ funds in Beta’s statement of financial position.

Required:

(a) Calculate the bid consideration.

(b) Calculate the earnings per share for the combined group.

(c) Calculate the theoretical post-acquisition price of Alpha plc shares assuming that the price/earnings ratio stays the same.

(d) Comment on the shareholder’s two points.

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Income statements for the year ended 31 March Year 9 Alpha pic £000 3,000 Sales revenue Operating profit Interest Profit before tax Tax Profit for the year Other information: Number of issued shares (million) Earnings per share Price/earnings ratio Market price per share Capitalisation (that is, market price per share x number of shares) 300 (100) 200 Alpha plc Beta plc (100) 100 Alpha plc 1.0 10p 20 200p £2m 2p 20,000 Dividend per share Dividends paid and proposed Historical share prices (in pence) at 31 March each year have been: Year 4 Year 5 Year 6 Year 7 60 90 150 160 90 80 120 140 Beta plc £000 2,000 140 (10) 130 (65) 65 Beta plc 0.5 13p 10 130p £0.65m 6p 30,000 Year 8 200 130