It is unlikely that Nente Co shareholders would accept the cash offer because it is little more than the estimated price of a Nente
Co share before the takeover offer. However, the share-for-share offer gives a larger increase in value of a share of 17·9%. Given
that the normal premium on acquisitions ranges from 20% to 40%, this is closer to what Nente Co shareholders would find
acceptable. It is also greater than the additional value from the follow-on product. Therefore, based on the financial figures, Nente
Co’s shareholders would find the offer of a takeover on a share-for-share exchange basis the most attractive option. The other
options considered here yield lower expected percentage increase in share price.
Mije Co shareholders would prefer the cash offer so that they can maximise the price of their shares and also not dilute their
shareholding, but they would probably accept either option because the price of their shares increases. However, Mije Co
shareholders would probably assess whether or not to accept the acquisition proposal by comparing it with other opportunities that
the company has available to it and whether this is the best way to utilise its spare cash flows.
The calculations and analysis in each case is made on a number of assumptions. For example, in order to calculate the estimated
price of a Nente Co share, the free cash flow valuation model is used. For this, the growth rate, the cost of capital and effective
time period when the growth rate will occur (perpetuity in this instance) are all estimates or based on assumptions. For the takeover
offer, the synergy savings and P/E ratio value are both assumptions. For the value of the follow-on product and the related option,
the option variables are estimates and it is assumed that they would not change during the period before the decision. The value
of the option is based on the possibility that the option will only be exercised at the end of the two years, although it seems that
the decision can be made any time within the two years.
The follow-on product is initially treated separately from the takeover, but Nente Co may ask Mije Co to take the value of the
follow-on product into consideration in its offer. The value of the rights that allow Nente Co to delay making a decision are
themselves worth $603,592 (appendix iii) and add just over 25c or 8·7% to the value of a Nente Co share. If Mije Co can be
convinced to increase their offer to match this or the rights could be sold before the takeover, then the return for Nente Co’s
shareholders would be much higher at 26·6% (17·9% + 8·7%).
In conclusion, the most favourable outcome for Nente Co shareholders would be to accept the share-for-share offer, and try to
convince Mije Co to take the value of the follow-on product into consideration. Prior to accepting the offer Nente Co shareholders
would need to be assured of the accuracy of the results produced by the computations in the appendices.
