Solutions In-class Practice Problems:
Mergers & Acquisitions
Consider the following pre-merger information about a bidding firm (firm B) and target firm (firm T). Assume that both firms have no debt outstanding
Firm B has estimated that the value of synergistic benefits from acquiring Firm T is $3,000.
If firm T is willing to be acquired for $27 per share
in cash, what is the NPV of the merger?
What will the price per share of the merged firm be
assuming the conditions in a)? What is the merger
c. Suppose firm T is agreeable to a merger by an exchange of stock. If B offers 3 of its shares for every 5 of T’s shares, what will the price per share of the merged firm be?
d. What is the NPV of the merger assuming the conditions in c)?
e. Are the shareholders in T better off with a cash or a stock offer?
f. At what exchange ratio of B shares to T shares would they be indifferent between cash or stock offer?
NPV = [600($24) + $3,000] – 600($27) = $1,200
[1,000($34) + $1,200]/1,000 = $35.20
merger premium = 600($27 – 24) = $1,800
600(3/5) = 360 new shares of B; VBT = 1,000($34) + 600($24) + $3,000 = $51,400
P = $51,400/1,360 = $37.79
NPV = 600($24) + $3,000 – 360($37.79) =
The cash offer is better for T’s shareholders, because they get $27 a share instead of 3/5($37.79) = $22.67 per share.
X = $27/$35.20 = .7670
Firm A is analyzing the possible acquisition of firm B. Neither firm has debt. The forecasts of firm A show that the purchase would increase its annual after-tax cash flow by $600,000. The current market value of firm B is $20 million. The current market value of firm A is $35 million. The appropriate discount rate for the incremental cash flow is 8%.
A) What is the synergy from the merger?...
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