Question

ABC Corp is buying XYZ Corp. A share of XYZ currently costs $19 with 200,000 shares outstanding. ABC has a share price of $25, with 200,000 shares outstanding. After the merger, the new firm with be able to reduce its net working capital by $ 750,000 and increase its EBIT by $300,000 per year for the next 30 years. The cost of capital for new firm is 18%. ABC will be pay $5 per share plus stock for XYZ.

a. What is the NPV of the Synergies of this merger?

b. How many shares of merged firm should ABC offer per share of XYZ if they want to offer XYZ 30% of the synergies?

Answer 1

All amounts are in $'000s unless specified

Year	PVF @18%	EBIT	PV of EBIT
0	1
1	0.847	300	254
2	0.718	300	215
3	0.609	300	183
4	0.516	300	155
5	0.437	300	131
6	0.370	300	111
7	0.314	300	94
8	0.266	300	80
9	0.225	300	68
10	0.191	300	57
11	0.162	300	49
12	0.137	300	41
13	0.116	300	35
14	0.099	300	30
15	0.084	300	25
16	0.071	300	21
17	0.060	300	18
18	0.051	300	15
19	0.043	300	13
20	0.037	300	11
21	0.031	300	9
22	0.026	300	8
23	0.022	300	7
24	0.019	300	6
25	0.016	300	5
26	0.014	300	4
27	0.011	300	3
28	0.010	300	3
29	0.008	300	2
30	0.007	300	2
	NPV of EBIT		1655
add:	Savings from Working Capital
	ie 750 x 18%		135
	Total Synergy		1790
	Total Shares o/s of XYZ		200
	Market Price per share		19
		Market Value	3800
	Total Shares o/s of ABC		200
	Market Price per share		25
		Market Value	5000
	XYZ Value + 30% synergies		4337
	Price of each share in ABC		$5
	No of shares for XYZ		867403
	ANSWERS
	a) NPV of Synergies		1790000
	b) Number of share for XYZ		867403

Explanatory Notes -

1) Working Capital savings is at Year 0 only,

2) Share price in new merged firm is $5 per share