Question

The firm Monster is planning to acquire Angel, another firm in the same industry. Relevant financial information for the two firms is shown below.

Monster: Price per share 4.50 . Number of shares 28,000,000 Dividend payout ratio 0.65

Angel: Price per share 1.90. Number of shares 10,500,000. Dividend payout ratio 0.20

Both firms are financed entirely by equity. The acquisition will result in expected cost savings for the merged (post-acquisition) firm with a total present value of $38 million.

(a) Assume for this part of the question that Monster’s shares are valued at $4.50 each. How many new shares would Monster issue to Angel's shareholders in exchange for the whole 10.5 million of Angel's shares? What is the total value and price per share of the merged firm? Should Monster pay for the acquisition on this basis? Explain briefly.

Assume now that Monster's shareholders will agree to the acquisition for a premium of $4.05 million

(b) What is the minimum number of shares Monster should offer, such that Angel's shareholders will participate in the acquisition?

(c) Assume Monster decides to acquire Angel by issuing the minimum number of shares as in part (b). In the first year the total earnings of the merged firm will be $15.87 million. Monster's dividend payout ratio will be maintained in the merged firm. What change in dividend payment will a former Angel shareholder get in the first year of the merged firm, if they had 1000 shares in Angel before the acquisition?

Answer 1

a) On the basis of Market value,

New No of Monster's shares to be issued = No. of Angel's share* value of Angel's Share/ Value of Monster's share

= $1.9* 10500000/ 4.5 = 4,433,333.33

So, Monster has to issue 4433333 new shares   

Value of the merged firm

= Value of Monster before merging + value of Angel before merging + present value of merger benefits

=4.5*28000000 + 1.9* 10500000 + 38000000

=$183,950,000

Share price of the merged firm =value of the firm/ total no of shares post merger

=183950000/(28000000+4433333)

=$5.6716 per share

Monster should pay for acqquisition on this basis as their share price will rise after merger.

b) If premium of $4.05 million is offered

New No of Monster's shares to be offered = (No. of Angel's share* value of Angel's Share+ premium)/ Value of Monster's share

= (1.9* 10500000+4050000)/ 4.5 = 5,333,333.33

So, Monster has to offer minimum 5,333,333 new shares   

c) Earnings per share of the merged firm = $15,870,000/(28000000+5333333) = $0.4761 per share

Dividend payout = 0.65*$0.4761 per share = $0.31 per share

Data is not sufficient to answer this question