Question Tag: Transaction costs

The directors and shareholders of both Jacobs Ltd and Idowu Co Ltd should consider the following factors in assessing the worthiness of the proposed takeover:

1. Price Premium:
   The shareholders of Idowu Co Ltd should evaluate whether the takeover price reflects a fair premium over their current market value. A premium is typically required to encourage the shareholders to sell, so they should aim for a price above the GH¢1.5 million market value.
2. Operational Synergies:
   Jacobs Ltd expects cost savings and additional revenue post-acquisition. The directors should carefully reassess the feasibility of the projected synergies, such as the GH¢60,000 annual increase in sales and GH¢50,000 reduction in operating expenses. If these estimates are overly optimistic, the actual benefits may fall short of expectations.
3. Impact on Employees and Company Culture:
   Any cost-saving measures, such as selling machinery or reducing expenses, might involve job cuts or operational changes. These decisions could affect employee morale and the long-term performance of the combined entity. The cultural alignment between the two companies should also be assessed to ensure smooth integration.
4. Transaction Costs and Resistance:
   Both companies must account for the potential transaction costs associated with the takeover. Additionally, if the takeover is resisted by Idowu’s management or alternative bidders emerge, the overall cost of the acquisition might increase significantly, reducing its attractiveness.
5. Regulatory and Competitive Environment:
   Both companies operate in the auto parts manufacturing industry. The combined entity’s potential market power might attract scrutiny from regulators. The directors should evaluate the likelihood of regulatory intervention and its impact on the business.
6. Control and Ownership Dilution:
   For shareholders in both companies, the change in control should be a key consideration. Shareholders in Idowu Co Ltd will see their ownership reduced after the exchange of shares, while Jacobs Ltd’s shareholders may see their control diluted due to the issuance of new shares.

(Any 4 points for 4 marks)