question archive Company A plans to acquire company B by making a full cash offer of $200 million
Company A plans to acquire company B by making a full cash offer of $200 million
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Company A plans to acquire company B by making a full cash offer of $200 million. Company A is also considering a stock exchange offer of .78125 share of A for one share of B. The transaction is expected to realize an expected synergy of $80 million. Additional company-specific information is provided in the table below.
|
|
Company A |
Company B |
|
Total Market Value ($ million) |
400 |
150 |
|
Number of Shares |
25 |
15 |
|
Price/Share |
16 |
10 |
Please answer the following questions.
a) What is the NPV of the acquisition if the cash offer is chosen? (6 marks)
b) What is the post-acquisition stock price of company A if the cash offer is chosen? (4 marks)
c) Is the exchange ratio of .78125 share of A for one share of B is optimal if the stock exchange offer is chosen? If not, at what rate should the exchange ratio be set so that shareholders will be indifferent between the cash and the share offer strategies? Show your results and related explanation. (10 marks)
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A.) $30 million
B.) $17.17
C.) No, it is not optimal for the shareholder of firm A. Indifferent exchange ratio should be 0.7560 share of firm A per share of firm B
Step-by-step explanation
A.) NPV of acquisition (cash offer)= Value of firm B + Value of synergy - Cash offered = $150 million + $80 million - $200 million = $30 million
B.) Post acquisition price of company A = (Value of company A + NPV of cash offer)/Number of shares of company A =
= ($400 million + $30 million)/25 million= $17.1667 per share
C.) Exchange rate is 0.78125 share per share of firm B.
So, total share offered to firm-B : 0.78125 * 10 = 7.8125 shares
Total shares of new firm = 16 existing + 7.8125 new = 23.8125 shares
Value per share = Value of new combined firm / 23.8125
Value of combined firm = Value of firm A + Value of firm B + Value of synergy = $400 million + $150 million+ $80 million = $630 million
Value per share = $630 million / 23.8125 = $26.4567 per share
value received by Firm B share holder (per share value of firm B) : 26.4567 * 0.78125 = $20.67
While value they received in cash offer = $200 million / 10 = $20
At indifferent point exchange ratio = $20 / $26.4567= 0.7560 share of firm A per share of firm B
