Question

- An Acquirer is considering the acquisition of a Target. The acquirer wishes to assess the impact of alternative forms of payment on post-merger earnings per share (EPS). Furthermore, the acquirer believes that any synergies in the first year following closing would be fully offset by costs incurred in combining the two businesses. The Acquirer’s marginal tax rate is 40%. Selected data are presented as follows:

Pre-Merger Data	Acquirer	Target
Net Earnings	$281,500,000	$62,500,000
Shares Outstanding	112,000,000	18,750,000
EPS	$2.51	$3.33
Market Price Per Share	$56.25	$62.50

a.     Calculate the post-merger first-year EPS following a share for share exchange in which each Target share is exchanged for 1.5 shares in the Acquirer.

b.     Calculate the post-merger first-year EPS for an all-cash deal in which the Acquirer pays $84.30 in cash per share of the Target. Assume the Acquirer borrows the entire purchase price at an 8% annual interest rate with the principal repaid in ten years (and do not forget the tax deductibility of interest).

Assume the Acquirer offers a mixed purchase price: part stock (1 share of Acquirer stock per target share) and part cash ($28.05 per target share). Assume further that the cash portion of the purchase price is financed by the acquirer at an 8% annual interest rate with the principal due in ten years (again, do not forget the tax deductibility of interest). What is the post-merger first-year EPS of the combined businesses?

Answer 1

a) post mergr effect

no. of shares= shares of acquirer+ (shares of target)*exchange ratio

=112000000+18750000*1.5

=140125000

post eps=(earnings of acquirer+ earnings of target)/no. of shares

=(281500000+62500000)/140125000

=2.455

b) post merger effect

no. of shares will not effect as this is the case of cash merger

earnings will change as amount is borrowed so interest will be deducted and tax saving will be added to it

borrowing effect

calculation of interest and tax saving

total cash borrowed=84.3*62500000=5268750000

interest= borrowing * rate

=5268750000*8%

=421500000

tax saving=421500000*40%=168600000

earnings after merger=(acquirer's earning-interest expense+tax saving)+target's earnings

=(281500000-421500000+168600000)+62500000

=91100000

post meger eps=91100000/112000000=0.813

c)post merger effect

no. of shares=acquirer's share+ target's share* exchange ratio

=112000000+18750000*1

=130750000

calculation of earnings

total amount borrowed=28.05*18750000

=525937500

interest expense= 525937500*8%=42075000

tax saving=42075000*40%=16830000

post earnings=(earnings of acquirer-interest expense+tax saving)+earnings of target

=281500000-42075000+16830000+62500000

=318755000

post eps=318755000/130750000=2.4379