Question

An acquirer has an issued capital of 300 million shares trading at $6.04. A target company has an issued capital of 500 million shares trading at $3.03. The acquirer expects synergies from an acquisition with a present value of $300 million and offers target company shareholders 0.5 acquirer shares for each target company share. What is the likely post-announcement price of acquirer company stock (to two decimal places)?

Answer 1

Facts

MPS of Acquirer company =$6.04.

No. Of. Shares outstanding in Acquirer Company = 300 Million

MPS of Target Company =$3.03

No. Of. Shares outstanding in Target company= 500 Million

Workings

1.Calculation of Market Value of Acquirer company post merger/acquisition.

A. Market Value of Acquirer before Merger/Acquisition=300 Million shares*$6.04= $1812 Million

B. Market Value of Target Company =500 Million shares*$3.03=$ 1515 Million

C. PV of Capital Synergy(Given) =$300 Million

D. Market Value of Acquirer company post Merger/Acquisition(A+B+C) =$ 3627 Million

2.Calculation of No. Of. Shares outstanding post merger/acquisition

A. No. Of. Shares outstanding before merger/acquisition= 300 Million

B. Shares issued/allotted to Target company Shareholders in the ratio of 1 share of Acquirer company for every two shares held in Target company= 500 Million* 1/2 = 250 Million

C. No. Of. Shares outstanding post merger/acquisition (A+B) = 550 Million Shares

3.Calculation of Post announcement price of Acquirer company

MPS = Market Value/No.of.shares outstanding

MPS= $3627 Million/550 Million shares

MPS=$ 6.59