CM Jewellery specialises in the import and distribution of artisan jewellwey from Europe. The business currently supplies

Fantastic news! We've Found the answer you've been seeking!

Question:

CM Jewellery specialises in the import and distribution of artisan jewellwey from Europe. The business currently supplies independent jewellers on the NSW south coast, targeting medium-income customers; it is considering launching a takeover of Tri-Beauty Corporation as the owner of the latter is selling the company due to retirement.

Tri-Beauty owns boutique jewellwey shops in local shopping centres, and through years of operation, has accumulated a stable customer base. CM Jerellery (the acquirer) plans to merge the customer database for future promotion campaigns. The business proposal also indicates that the two companies’ supply and delivery channels can be integrated for a higher efficiency. The business analyst at CM Jewellery estimates that the acquisitions will help increase the before-tax cash by $22 million per year.

You are also given the following information regarding the acquirer and the target:

	CM Jewellery	Tri-Beauty
Assets ($m)	5000	700
Debt($m)	2725	175
Share Price($)	65	35
Number of shares (m)	35	15

The corporate tax rate is 30%, and the appropriate discount rate for the combined company is 10%. For the following questions, please ignore all transaction costs and fees.

Name two types of synergies that will arise in this acquisition deal. For each synergy type, identify the source of value creation given the company specifics. Calculate the value of the after-tax synergies.
CM Jewellery is proposing a share offer to the target company’s board. What is the maximum exchange ratio that can be offered by the acquirer?
If the offered exchanged ratio is 0.5, do you think the target company should agree to the deal? If not, name two defence strategies that can be used by the target company’s board of directors. Briefly explain how the strategies can be implemented.
After the first round of negotiation, the target company agrees to receive 30% of the synergies, on condition that the acquirer makes a cash offer. Calculate the number of shares that need to be issued by the acquirer to fund the acquisition.
If the cash offer goes through, what is the share price of the combined company after the acquisition. Remember to adjust the acquirer’s company value by the newly issued shares as in part (d).