Question

Whitehill Publishing, a publisher of academic textbooks, has made an offer to acquire Yellowtape, a publisher of children’s books. The management teams at both companies have tentatively agreed upon a transaction value of Rs 56 per share for Yellowtape but are presently negotiating alternative methods of payment. Data used for the analysis of the transaction is given below

	Whitehill Publishing	Yellowtape
Pre-merger Stock Price	Rs 80	Rs 48
Number of shares outstanding (millions)	30	20
Pre-merger market value (millions)	Rs 2,400	Rs 960

Once the merger is completed, Mr. Bhatia, the CEO of Whitehill Publishing, plans for Whitehall to take on all of Yellotape’s assets and liabilities and the combined company will continue to operate under the Whitehill Publishing name. Mr. Bhatia estimates that cost reduction synergies as a result of the merger will total approximately Rs 180 million.

1. Briefly define the form of integration and type of merger in this transaction.

                                                                                                                          

2. If the deal is completed as a cash transaction, the amount of the gain for Yellowtape’s shareholders.

                                                                                                                            (1 mark)

3. If the deal is completed as a stock transaction with an exchange ratio of 0.7, the amount of the gain for Whitehall’s shareholders.

Answer 1

Answer-(a) Here in this question this is a horizontal merger. This type of merger takes place between companies in the same industry, whitehall publishing and yellowtape are both in the same business of publishing books.

Answer in rupees(million)

Answer (b) Swap ratio= Market price per share of yellowtape/ whitehill = 48/80 = 0.6

Market price per share after merger= 2400+960+180   = 84.2857142

  30+20x 0.6

Gain to the sharholder of yellowtape= market value after merger- market value before merger

= (20*84.2857142*0.6) - (20*48)= 51.4285704

(c) Gain to shareholder of whitehil post merger with an exchange ratio of 0.7

Market price after merger= 2400+960+180 = 80.454545

30+20*0.7

Gain= (30*80.454545) - 2400 = 13.6363