Infosys plc is a computer software development company, which is considering an acquisition of LogicIO plc, a software distribution company. Infosys has been advised by its investment bankers that a combined development and distribution company would generate annual cost savings of 7 million for the foreseeable future (in perpetuity). Both companies are financed entirely by equity. Infosys has 29 million shares outstanding at a price of 4.70 each, whereas LogicIO has 10 million shares outstanding at a price of 10.07 each. The cost of capital of the combined company is 20%. Assume that the acquisition occurs with certainty.

The investment bank that is advising Infosys suggests two alternative courses of actions:

According to the Option A, the investment bank suggests that an initial bid with a premium of 33% would be sufficiently high to persuade LogicIOs shareholders to sell their holdings to Infosys. In addition, it is recommended to use Infosyss cash reserves to fund the takeover bid.

According to the Option B, it has been proposed that Infosys plc should bid for LogicIO using equity instead of cash. Infosyss investment bankers advise Infosys to offer three shares of Infosys for every one share of LogicIO.

a) Does the acquisition proposed in the Option A generate a positive NPV investment for Infosyss shareholders?

b) Based on the option A, do Infosyss shareholders gain in a change of price per share? Compare Infosyss price per share before and after the acquisition.

c) What is the actual percentage premium given to LogicIOs shareholders if Infosys decides to act according to the Option B? Are LogicIOs shareholders benefiting from this deal? If so, by how much? Explain.

d) Evaluate the proposed takeover from the perspective of Infosyss shareholders based on the option B. Show your calculations. Which course of action (A or B) should Infosys choose?

e) Discuss the type of merger in the case of Infosys and LogicIO. What are the main benefits and rationale of this type of merger? What kind of synergy can this type of merger create?