Question

Jael is a hospitality company that considers acquiring Sisera Inc. Jael share market price is $50 and there are 1M of Jael shares outstanding. Sisera has 0.1M shares outstanding worth $150 each. If Jael acquires Sisera, then the resulting synergy will amount to $10M.

a) Suppose Jael offers to exchange every Sisera’s share for four shares in the merged company. What will be the share price of the merged company?

b) What will be the total benefit for the existing shareholders of Jael?

c) What about the existing shareholders of Sisera?

d) Suppose Jael offers to exchange every Sisera’s share for $200 in cash. What will be the share price of the merged company?

e) What will be the total benefit for the existing shareholders of Jael?

f) What about the existing shareholders of Sisera?

Answer 1

a) New Shares Created=100,000*(4/1)=400,000

Therefore total shares= 1,000,000+400,000= 1,400,000

Value of Merged Entity: (Market Value of Acquirer + Market Value of Target + Synergy Benefit)

                                            =(1,000,000*50+100,000*150+10,000,000)

                                            =75,000,000

Price Per Share of Merged Entity=75,000,000/1,400,000=53.5714

b) The value of the stock price has risen from $ 50 to $ 53.714 which is a gain of $ 3.714

c) For Sierra for every 1 share of $ 150 they are getting 4 shares for $ 53.714. Therefore, their net gain:

(4*53.714)-(150)= $ 64.28

d) With $ 200 for cash Jael will have to payout:

200*100,000=20,000,000

Therefore, share price of new entity:

1,000,000*50+10,000,000-20,000,000/(1,000,000)=$ 40

(Note denominator still 1,000,000 as no new shares created)