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Hav Co Mark Fielding-Pritchard

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Part ATypes of synergy Comment Relevance

Operational departmental synergies,

1 HR, 1 Audit (internal & external) Yes, these ‘simple savings should be achievable)

Operational synergies Sharing of distribution networks, client lists, access to restricted contracts, automation

Difficult to see overlaps

External financing Larger so cheaper finance may be available

Possibly though the fall in P/E predicted indicates external concern over the merger

Internal finance Broader range of projects to easier to invest funds. Larger pool of funds so industries with high barriers to entry become more accessible

This could bring benefits but the group will still be small by industry standards

Management Culture change or management knowledge

The possible commercialisation of the culture of target will have 1 of 2 effects. Either sales will increase or the scientists will leave

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Part B

Earnings Average earnings =

1/3[397+370+352]=373

Average capital = 1/3 [483+466+459]=469

[373-(469*20%)]80%= 223

223/7%= $3.2bm

Synergy Current value

Hav (9.24x 2400) =22176

Strand [(16.4x1.1)x(397x80%)]= 5717

Total 28000

After

[(1980+397)80%]+140= 2040

2040x 14.5= 29600

Growth $1.6bn

So the purchaser wants to pay twice what the seller is asking for!!

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Part C Strand Current EPS [397x80%)/1200= 26.5c

Therefore share price at P/e of 18 = $4.75

Option 1 (5.72-4.75)/4.75= 20.4%

Option 2 ((2.66+9.24)-(4.75x2))/(4.75x2)=25%

Option 3 20 shares gives you $25 plus 1 bond. 1 bond gives 12 Hav shares. Therefore [((25+(9.24x12))-(20x4.75)]/(20x4.75)

The answer assumes that the market value of the bond is $100. This ignores the conversion rights. Whether the bond has additional value will depend on whether early conversion can take place (seems no) or whether it can be traded

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Part C

Investors will generally take cash

Standard take over premiums are 30% so an initial refusal should be expected

Bonds are usually only taken by holders of major blocks

You may want to force managers to take equity if possible so they don’t leave and set up in competition

Business angels should not be allowed equity as they can build up big holdings in Hav