This report provides an estimate of the additional value created if Opao Co were to acquire Tai Co, and the gain for each company's shareholders based on a cash offer, a share-for-share offer and a mixed offer. It evaluates the likely reaction of the two companies' shareholders to each payment method.
Summary of the estimates from the appendices
From appendix 1
Opao Co equity value pre-acquisition: $5,000m
Tai Co equity value pre-acquisition: $1,000m
Combined company equity value post-acquisition: $6,720m
From appendix 2
Therefore, additional value based on synergy benefits is $720m or 12% ($720m/$6,000m)
Estimated percentage gain in value
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Likely reactions
Tai Co's shareholders are likely to consider all the offers made, because they all fall within the range of premiums paid in previous acquisitions of 15% to 40%. The cash offer is at the lower end of the range, the share-for-share offer at the top end of the range and the mixed offer in between. It is likely that Tai Co's shareholders will be more attracted to the share-for-share offer as it maximises their return. However, this offer is reliant on the fact that the expected synergy benefits will be realised and Tai Co will probably need to analyse the likelihood of this. Cash payment, although much lower, gives a certainty of return. The mixed offer provides some of the certainty of a cash payment, but also offers a higher return compared to the cash offer. This return is roughly in the middle of the premium range. It may therefore prove to be the better option for Tai Co's shareholders.
Opao Co's shareholders benefit less from the acquisition compared to Tai Co's shareholders. In each case, they get less than the additional value created of 12%, with the cash payment offering the highest return of 11·2%, which is just below the 12% overall return. The share-for-share offer gives the least return at just over half (6·4%) of the overall return of 12%. Nevertheless, with this option, cash is retained within Opao Co and can be used for other value creating projects. Opao Co's shareholders may also prefer the mixed offer, because the return they are expecting to receive is between the cash and share-for-share offers. Also, less cash resources are used compared to the cash offer, and they still benefit from a significant proportion of the additional value created.
Conclusion
Based on the benefits accruing to both sets of shareholders, it is not possible to conclusively say that one method of acquisition payment would be acceptable to both sets of shareholders. However, both sets of shareholders may be persuaded that the mixed offer provides a reasonable compromise between the wholly cash and the wholly share-for-share prices. Given that synergy benefits are shared (even if not equally), both companies' share prices should increase if the acquisition proceeds, as long as the estimates when estimating the valuations are reasonably accurate.
