Question

In: Accounting

Your company has earnings per share of $4. It has 1million shares​ outstanding, each of which...

Your company has earnings per share of $4. It has 1million shares​ outstanding, each of which has a price of $36. You are thinking of buying​ TargetCo, which has earnings per share of $1​, 1million shares​ outstanding, and a price per share of $22. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a 24% premium to buy TargetCo. Assume that on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.

a. What is the price per share of the combined corporation immediately after the merger is​ completed?

b. What is the price of your company immediately after the​ announcement?

c. What is the price of TargetCo immediately after the​ announcement?

d. What is the actual premium your company will​ pay?

Solutions

Expert Solution

Current Price of Target Company = $ 22

Add : 24% Premium = $ 22 x 24% = $ 5.28

Offer Price = $ 22 + $ 5.28 = $ 27.28

Our Company Price = $ 36

So Exchange Ratio = $ 27.28 / $ 36 = 0.76

Number of shares issued = 1 million x 0.76 = 0.76 million

Total Number of shares issued after merger = 1 million + 0.76 million = 1.76 million

a) Price Per Share after Merger

Sum of Current Price of Both Companies / Total Number of shares issued after merger

= $ 22 + $ 36 / 1.76 = $ 32.95

b) The price of our company immediately after the​ announcement = Same Price as merger Price = $ 32.95

c) The price of TargetCo immediately after the​ announcement

Price after Merger x Number of Shares of Holding Company x Exchange rate

= $ 32.95 x 1 million shares x 0.76

= $ 25.042 million

d) The actual premium our company will​ pay

The price of TargetCo immediately after the​ announcement / Current Price of Target Company

= $ 25.042 / $ 22 -1 = 13.83%

ie,22+ (22 x 13.83% ) = 22 + 3.042 = 25.042


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