Cartel Corporation is acquiring the Superior Corporation. Neither firm has any debt outstanding. Cartel has 150 million shares of stock outstanding with a market price of $30 per share. Superior has 100 million shares of stock outstanding with a market price of $14 per share. Cartel's advisors estimate the value of synergy today to be $120 million.

a.        What is the estimated market value of the combined companies? (2 points)

b.        Suppose Cartel pays $1.5 billion in cash to buy 100 percent of the common stock of Superior. What is the NPV of the merger? (5 points)

 

c.        If Cartel offers 20% of the combined firm's stock to Superior's shareholders, what is the NPV of the merger? (5 points)

 

a) Total estimated market value of the combined companies = $6,020 Million

b) 1) NPV of the merger to Cartel = $20 Million (Cash Deal)

b) 2) NPV of the merger to Superior =$100 Million (Cash Deal)

c) 1) NPV of the merger to Cartel = $316 Million (Stock Deal)

c) 2) NPV of the merger to Superior= - $196 Million (Stock Deal)

Step-by-step explanation

• Cartel's Outstanding Share = 150 million 

• Cartel's market price per Share = $30

• Superior Outstanding Share = 100 million

• Superior 's market price per Share = $14 per share

• Value of synergy today = $120 million

a) Calculation of estimated market value of the combined companies:

Market Value of Cartel = 150 * 30 = $4,500 Million

Add: Market Value of Superior = 100*14 = $1,400 Million

Add: Value of Synergy = $120 Million

Total estimated market value of the combined companies = $6,020 Million

b) If Cartel pays $1.5 billion in cash to buy 100 percent of the common stock of Superior then amount of NPV of the merger:

Step 1) Market Value of Cartel after Cash Deal:

Market Value of Cartel = 150 * 30 = $4,500 Million

Add: Market Value of Superior = 100*14 = $1,400 Million

Add: Value of Synergy = $120 Million

Less: Cash Paid to Acquire 100 percent of the common stock of Superior = $1.5 Billion = 1,500 Million

= $4,520 Million, So, Market Value of Cartel after Cash Deal: = $4,520 Million

Step 2) NPV of the merger to Cartel = Market Value of Cartel after Cash Deal - Pre merger Value of Cartel

= $4,520 - $4,500

= $20 Million

Step 3) NPV of the merger to Superior:

= Cash Received under Cash acquisition - Pre merger Value of Superior

=1,500 - 1,400

= $100 Million

c) If Cartel offers 20% of the combined firm's stock to Superior's shareholders, then amount of the NPV of the merger:

Step 1) Calculation of NPV of the merger to Cartel

Portion of Cartel's Original Shareholders' Holding = 100 -20% = 80%

Value of Cartel's Original Shareholders' Holding in Total Value of Merged Cartel = market value of the combined companies * Portion of Cartel's Original Shareholders' Holding

= 6,020 * 80% =$4,816

NPV of the merger to Cartel = Value of Cartel's Original Shareholders' Holding in Total Value of Merged Cartel - Pre merger Value of cartel

= 4,816 -4,500

= $316 Million

Step 2) NPV of the merger to Superior:

Portion of Cartel's Original Shareholders' Holding =20% 

Portion of Superior's Original Shareholders' Holding in Total Value of Merged Superior = market value of the combined companies * Portion of Superior's Original Shareholders' Holding

= 6,020 * 20% =$1,204

NPV of the merger to Superior = Value of Cartel's Original Shareholders' Holding in Total Value of Merged Superior - Pre merger Value of Superior

= 1,204 - 1,400

= - $196 Million