Macrosoft Corporation is a software giant in personal computers (PCs). Although its flagship operating system 'Meadow' is still dominating in the PC market, the burgeoning of tablets and smartphones in recent years has been chewing up the PC market. In fact, the numbers of new Meadow users was shrinking every year.
In view of this situation, Macrosoft is considering making an offer to purchase Oats Production, and upstart smartphone producer in China.
The management of Macrosoft hopes that the acquisition could allow the company to explore the smartphone software market and bring in new revenue to the firm. The treasurer of Macrosoft has collected the following information:
|
Macrosoft Corporation |
Oats Production |
| Shares outstanding |
1,500,000 |
800,000 |
| Earnings |
$8,400,000 |
$2,400,000 |
| Divdends |
$4,200,000 |
$1,800,000 |
| Price-earnings ratio |
18X |
15X |
The treasurer also discovers that the earnings and dividends of Oats will grow at a constant rate of 6% every year. If the acquisition is successful, the management of Macrosoft believes it will bring synergy to the firm and increase Oats' growth rate to 8.8% per year. Both companies do not have any debts incurred.
Analyse whether Macrosoft should carry out the acquisition. If so, should it be in cash or in stock? Explain.