Question

Retro Co is an American pharmaceutical corporation that produces medicines and vaccines for a wide range of medical disciplines, including immunology, oncology, cardiology, etc. In 2015, it has expired. Pharma Inc a leading German pharmaceutical corporation. The acquisition costed $1.6 billion and it was made for cash It has resulted in $623 million cost reduction per year. Assume that the values of both Retro Co, and Pharma Inc before acquisition were $15.8 billion and $6.3 billion respectively and that the opportunity cost of capital is 14%.

1. What is the type of this combination?

2. What is the gain from this acquisition?

3. How much cash money was paid by Retro Co. to Pharma Inc.?

4. If Retro Co. had paid $150 in cash for every share of Pharma Inc., how many shares had Pharma Inc., before the acquisition (approximately)?

5. What is the Net Present Value (NPV) of this acquisition?

Answer 1

1.

Business Combination

A business combination is the union of the small business units into one. The new combined unit is known as business Combination. This combination is done for various purposes.A business combination generally increases the efficiency and productivity while reducing the Costs.

2.

Calculation of Gain from this Acqusition

Value of Pharma Company = $6.8 Billion

(-) Cost of Acquisition = $1.6 billion

Gain from Acqusition = $5.2 billion

3.

Cash Paid by Retro Co. to Pharma Co. = Acqusition paid in cash

= $1.6 Billion

4.

If Retro Co. paid $150 cash per every share of pharma, Shares that pharma Co, will give is

No. of Shares = Cost of Acqusition/Cash per share

= $1.6 Billion/$150

= 10.67 Million Shares (Approximately)

5.

Calculation of Net Present Value of the Acquisition

Cost Reduction = $623 Million per year

Cost of Capital = 14%

Total Present value of cost reduction = $623/14%

= $4,450 Million or 4.45 Billion

Cost of Acquisition = $1.6 Billion

Net present Value = $2.85 Billion