Exercise: Merge and Acquisition
1/ Holmes, Inc., has offered $295 million cash for all of the common stock in Watson
Corporation. Based on recent market information, Watson is worth $278 million as an
independent operation. If the merger makes economic sense for Holmes, what is the
minimum estimated value of the synergistic benefits from the merger?
2/Consider the following premerger information about firm X and firm Y:
Firm X Firm Y
Total earnings $105,000 $48,300
Shares outstanding 43,900 33,000
Per share values:
Market $53 $19
Book 21 $9
Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at
a merger premium of $5 per share. Assuming that neither firm has any debt before or
after the merger, construct the postmerger balance sheet for Firm X assuming the use
of the purchase accounting method.
3/ Assume that the following balance sheets are stated at book value. Suppose that
Jurion Co. purchases James, Inc. Then suppose the fair market value of James’s fixed
assets is $23,000 versus the $13,300 book value shown. Jurion pays $30,400 for
James and raises the needed funds through an issue of longterm debt. Construct the
postmerger balance sheet under the purchase method of accounting.
Jurion Co.
Current assets $27,000 Current liabilities $7,700
Net fixed assets 49,000 Long-term debt 13,800
Equity 54,500
Total $76,000 Total $76,000
James, Inc.
Current assets $5,200 Current liabilities $3,300
Net fixed assets 13,300 Long-term debt 2,100
Equity 113,100
Total $18,500 Total $18,500
4/ Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have
no debt. Penn believes the acquisition will increase its total aftertax annual cash flow
by $1.3 million indefinitely. The current market value of Teller is $27 million, and that
of Penn is $62 million. The appropriate discount rate for the incremental cash flows is
11 percent. Penn is trying to decide whether it should offer 35 percent of its stock or
$37 million in cash to Teller’s shareholders.
a. What is the cost of each alternative?
b. What is the NPV of each alternative?
c. Which alternative should Penn choose?
5/ The shareholders of Flannery Company have voted in favor of a buyout offer from
Stultz Corporation. Information about each firm is given below. Flannery’s
shareholders will receive one share of Stultz stock for every three shares they hold
in Flannery.
a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV
of the acquisition is zero?
b. What must Stultz feel is the value of the synergy between these two firms? Explain
how your answer can be reconciled with the decision to go ahead with the takeover.
Flannery Stultz
Price -earnings ratio 6.35 12.70
Shares outstanding 73,000 146,000
Earnings $230,000 $690,000
6/ Firm A does well in a boom economy. Firm B does well in a bust economy. The
probability of a boom is 50%. The end of period values of the two firms depend
on the economy as shown below:
Economy Probability Value of A Value of B
Boom .5 $1,600 800
Bust .5 800 2,000
Expected Value $1,200 $1,400
Both firms have debt outstanding with a face value of $1,000. In order to
diversify, the two firms have proposed a merger. The NPV of the merger is zero.
Determine the gain or loss under each state of economy for the stockholders of A
and B separately and for the combined firm AB. Should either the stockholders or
bondholders be willing to support the merger (prove and state why)?
7/ Firms A and B, both of which are 100% equity, are going to merge. Before the
merger, Firm A (100 shares outstanding) is worth $15,000. Firm B (50 shares
outstanding) is worth $10,000. The combined firm is worth $30,000. Firm A will pay
$11,500 in cash for Firm B. What is the NPV of the merger to Firm A?
8/ Dexter Department Stores has a market value of $400 million and 20 million
shares outstanding. Walnut Stores has a market value of $134 million and 13.4
million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top
management of Dexter's have determined that due to the synergies between the
firms the combination will worth $667 million. Dexter expect to pay a $67 million
premium for Walnut Stores.
If Dexter offers 10 million shares in exchange for the 13.4 million shares of Walnut,
what will the exchange ratio and the equivalent cash value?
9/ Dexter Department Stores has a market value of $400 million and 20 million
shares outstanding. Walnut Stores has a market value of $134 million and 13.4
million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top
management of Dexter's have determined that due to the synergies between the
firms the combination will worth $667 million. Dexter expect to pay a $67 million
premium for Walnut Stores.
If Dexter offers 10 million shares in exchange for the 13.4 million shares of Walnut,
what will the after acquisition stock price of Dexter be?
