Question

LTD Inc is considering a takeover of XYZ Inc. You have gathered the following information regarding the two companies.

	LTD Inc	XYZ Inc
Price per share	40	15
Shares outstanding	1,000,000	500,000
Earnings	2,000,000	300,000

1. LTD Inc is planning on taking over XYZ Inc by doing a share exchange. LTD Inc will exchange one of its shares for every 2 shares of XYZ Inc. The synergies are $2,000,000 in total (NOT annually). What will be the price per share after the transaction is completed?

2.What is the total premium paid to XYZ Inc?

3.If the NPV of the acquisition to LTD Inc. is equal to zero, then LTD Inc would exchange a total of _________ shares for the shares of XYZ Inc.

Answer 1

	LTD Inc (Acquiring Company)	XYZ Inc (Target Company)
i) Price per share	40	15
ii) Shares outstanding	1,000,000	500,000
iii) Earnings	2,000,000	300,000
iv) Earnings per share (iii/ii)	2.00	0.60
v) Market capitalisation (i*ii)	40,000,000	7,500,000

Question 1

Market Capitalisation (after taking over) = Market Capitalisation of LTD Inc + Market Capitalisation of XYZ Inc+Synergy Gain

= 40,000,000 + 7,500,000 + 2,000,000

= $49,500,000

Shares outstanding after taking over = 1,000,000 + 500,000 / 2 *1

= 1,000,000 + 250,000

= 1,250,000

Price per share after taking over = Market Capitalisation after taking over/Shares outstanding after taking over

= 49,500,000 / 1,250,000

= $39.60

Question 2

i) Theoretical post merger price = $39.60 (see above)

ii) Purchase Consideration = shares issued to XYZ Inc * Theoretical post merger price

= 250,000 * 39.60

= 9,900,000

iii) Market capitalisation of XYZ Inc = 7,500,000

iv) Premium Paid (ii - iii) = 9,900,000 - 7,500,000

= 2,400,000

Question 3

Let 'n' be the total number of shares issued by LTD Inc.

(40,000,000+7,500,000+2,000,000) / (1,000,000+n) * n = 2,000,000 (see note below)

49,500,000/ (1,000,000+n) = 2,000,000/n

49,500,000n = (1,000,000+n)*2,000,000

495n = 20,000,000 + 20n

475n = 20,000,000

n = 42,105 (approximately)

note: Since the NPV of the acquisition to LTD Inc. is equal to zero,

Synergy Gain = Estimated real value of XYZ Inc.(Purchase consideration)