Question

Please answer the following:

1.     An acquirer’s standalone share price is $12 and its number of shares outstanding is 1,000,000. The target firm has 100,000 shares outstanding, and its standalone share price is $10. The present value of the after-tax synergy gains from merging the two firms is $500,000.

a.     If the acquirer offers to buy the target for $13 in cash, what is the acquisition premium for target shareholders?

b.     If the acquirer offers to buy the target for $13 in cash, what is the NPV of the deal for acquirer shareholders?

c.     If instead the offer price for the target firm is 1.2 shares of the acquirer for every share of the target, what should the acquirer’s post deal stock price be?

d.     Under the conditions in c. above, what is the NPV of the deal for acquirer shareholders?

e.     What is the exchange ratio in this deal that would leave the acquirer’s stock price unchanged from before to after the merger?

f.      Under the conditions in c. above, what would the acquirer’s stock price be if the synergy gains were only $300,000? Does the deal still create value for acquirer shareholders?

-For question #1c., what is the post-merger ownership distribution? In other words, what fraction of the newly merged firm is owned by the old acquirer shareholders and what fraction is owned by the old target shareholders?

Answer 1

Facts of question

Value of Target Company =1000000 (100000*10)

Synergy Gain =500000

Maximum value to be paid by acquirier =1500000 (1000000+500000)

No.of Shares in Target Company =100000

Maximum Price to be offered =15 (1500000/100000)

a.. If the acquirer offers to buy the target for $13 in cash, what is the acquisition premium for target shareholders?

Offer Price to be paid in Cash =13

Market Price of Target Company =10

Gain per Share =3 (13-10)

No.of Shares in Target Company =100000

Acquisition premium for target shareholders=300000 (100000*3)

b.     If the acquirer offers to buy the target for $13 in cash, what is the NPV of the deal for acquirer shareholders?

Maximum value to be paid by acquirier =1500000

Amount paid to target Company =1300000 (13*100000)

NPV for Acuirer shareholders =200000 (1500000-1300000)

c.     If instead the offer price for the target firm is 1.2 shares of the acquirer for every share of the target, what should the acquirer’s post deal stock price be?

Offer price for target firm =14.4 (1.2*Acquirer share price i.e 12)

No.of share to be offered =120000 (100000*14.4/12)

Maximum value of Shares Issued by acquirer=1440000 (12*120000)

Existing Value of Acquirer Firm =12000000 (12*1000000)

Synergy Gain in Acquistion =500000

Total Post Merger Value of Firm =13940000

Total Post merger Shares of Firm =1120000 (1000000 acquirer firm+120000 Target Firm)

So,Post Acquistion Share Price =12.44643 (13940000/1120000)

d.     Under the conditions in c. above, what is the NPV of the deal for acquirer shareholders?

Maximum value to be paid by acquirier =1500000 (Calculated Above)

Maximum value of Shares Issued by acquirer =1440000

NPV for Acuirer shareholders =60000

e.     What is the exchange ratio in this deal that would leave the acquirer’s stock price unchanged from before to after the merger?

Exchange Ratio =Share Price of Selling Firm i.e Target firm/Share price of Buying Company i.e Acquirer's

=10/12 (Assuming No Synergy Gain)

=0.8333 Shares of Acquirer for every share of Target firm

f.      Under the conditions in c. above, what would the acquirer’s stock price be if the synergy gains were only $300,000? Does the deal still create value for acquirer shareholders?

Maximum value of Shares Issued by acquirer=1440000 (12*120000)

Market Value of Target firm =1000000 (10*100000)

Synergy Gain in Acquistion =300000

Total Post Merger Value of Target firm =1300000 (1000000+300000)

Loss in Merger or Acquistion =144000 (1440000-1300000)

Conclusion:- It is not Creating any value for Acquirer Shareholders if Synergy Gain is 300000

what is the post-merger ownership distribution?

Total Post Merger Value of Firm =13940000

Maximum value of Shares Issued by acquirer=1440000

Existing Value of Acquirer Firm =12000000 (12*1000000)

Fraction of Target firm: Acquirer firm= 1440000:12000000

=1.2:10