Question

An acquirer has an issued capital of 300 million shares trading at $6.06. A target company has an issued capital of 500 million shares trading at $2.99. The acquirer expects synergies from an acquisition with a present value of $200 million. What is the maximum exchange ratio (to two decimal places) that could be offered in a stock swap and still generate a positive-NPV for the acquirer?

Answer 1

Here, M = millions

1) Market value of Acquirer company (A) = 300 M * 6.06 = $ 1818 M

2) Market value of Taget company (T) = 500 M * 6.06 = $ 1495 M

3) Expected Synergies in present value (S) = $ 200 M

4) No. of share of target company (N_T) = 500M

5) Market price per share of Aquirer (P_A) = $ 6.06

Here, question says that NPV for acquirer should not be negative after the maximum exchange ratio.

So, What will be per share price of target company, if all the synergies profit will be allocated to Target company.

Target company price per share (with 100% synergies) = (T + S) / N_T

                                                                                                 = (1495 M + 200 M)/ 500M

                                                                                               = $ 3.39 /share

So, Exchange Ratio on the basis of market price = $3.39 / $6.06   

Exchange ratio = 0.5594    or 0.56 (Approximately rounded off to two decimal place)

So, 0.56 is maximum exchange ratio at which aquirer will have positive NPV.

Alternate method :

Let's consider the maximum no. of share the aquirer can offer =

With the help of above logic or concept (for Positive NPV of aquirer company) , We can say that

So, Maximum exchange ratio can be 0.56 (Approximately) of per share of target company.