Infosys plc is a computer software development company, which is considering an acquisition of LogiclO 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 LogiclO 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 LogiclO's shareholders to sell their holdings to Infosys. In addition, it is recommended to use Infosys's cash reserves to fund the takeover bid. According to the Option B, it has been proposed that Infosys plc should bid for LogiclO using equity instead of cash. Infosys's investment bankers advise Infosys to offer three shares of Infosys for every one share of LogiclO. a) Does the acquisition proposed in the Option A generate a positive NPV investment for Infosys's shareholders?
Infosys plc is a computer software development company, which is considering an acquisition of LogiclO 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 LogiclO 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 LogiclO's shareholders to sell their holdings to Infosys. In addition, it is recommended to use Infosys's cash reserves to fund the takeover bid. According to the Option B, it has been proposed that Infosys plc should bid for LogiclO using equity instead of cash. Infosys's investment bankers advise Infosys to offer three shares of Infosys for every one share of LogiclO. a) Does the acquisition proposed in the Option A generate a positive NPV investment for Infosys's shareholders?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Infosys plc is a computer software development company, which is considering an
acquisition of LogiclÓ 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 ata 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 altemative 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 LogiclO's shareholders to sell
their holdings to Infosys. In addition, it is recommended to use Infosys's cash reserves
to fund the takeover bid.
According to the Option B, it has been proposed that Infosys plc should bid for Logiclo
usingequity insteadof cash. Infosys'sinvestmentbankers advise Infosys to offer three
shares of Infosys for every one share of LogiclO.
a) Does the acquisition proposed in the Option A generate a positive NPV
investmentfor Infosys's shareholders?
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