(c)
Suppose firm T is agreeable to a merger by an exchange of equity. If B offers three
(d)
of its shares for every one of T ‘s shares, what will the price per share of the merged firm be?
What is the NPV of the merger assuming the conditions in (d)?
(e)
Cash versus Equity as Payment
30 In problem 30, are the shareholders of firm T better off with the cash offer or the equity offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?
Effects of a Equity Exchange
31 Consider the following pre-merger information about firm A and firm B:
Firm A Firm B
Total earnings (DKr) 900 600
Shares outstanding 550 220
Price per share (DKr) 40 15
Assume that firm A acquires firm B via an exchange of equity at a price of DKr20 for each share of B’s equity. Both A and B have no debt outstanding.
What will the earnings per share (EPS) of firm A be after the merger?
(a)
What will firm A’s price per share be after the merger if the market incorrectly
(b)
analyses this reported earnings growth (that is, the price–earnings ratio does not change)?
What will the price–earnings ratio of the post-merger firm be if the market correctly
(c)
analyses the transaction?
If there are no synergy gains, what will the share price of A be after the merger?
(d)
What will the price–earnings ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.
Merger NPV
32 Show that the NPV of a merger can be expressed as the value of the synergistic benefits, ΔV, less the merger premium.
Merger NPV
33 Fly-By-Night Couriers is analysing the possible acquisition of Flash-in- the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchases would increase its annual after-tax cash flow by £600,000 indefinitely. The current market value of Flash-in-the-Pan is £20 million. The current market value of Fly-By-Night is £35 million. The appropriate discount rate for the incremental cash flows is 8 per cent. Fly-By-Night is trying to decide whether it would offer 25 per cent of its equity or £25 million in cash to Flash-in-the-Pan.
What is the synergy from the merger?
(a)
What is the value of Flash-in-the-Pan to Fly-By-Night?
(b)
What is the cost to Fly-By-Night of each alternative?
(c)
What is the NPV to Fly-By-Night of each alternative?
(d)
Which alternative should Fly-By-Night use?
(e)
Merger NPV
34 Harrods plc has a market value of £600 million and 30 million shares outstanding. Selfridge Department Store has a market value of £200 million and 20 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be worth £1 billion, and Selfridge can be acquired at a premium of £100 million.
___
If Harrods offers 15 million shares of its equity in exchange for the 20 million shares
(a)
of Selfridge, what will the equity price of Harrods be after the acquisition?
What exchange ratio between the two equities would make the value of equity offer
(b)
equivalent to a cash offer of £300 million?
Mergers and Shareholder Value
35 Bentley plc and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:
State Probability Bentley Rolls
Boom 0.70 £300,000 £260,000
Recession 0.30 £110,000 £80,000
Bentley currently has a bond issue outstanding with a face value of £140,000. Rolls is an all-equity company.
What is the value of each company before the merger?
(a)
What are the values of each company’s debt and equity before the merger?
(b)
If the companies continue to operate separately, what are the total value of the
(c)
companies, the total value of the equity, and the total value of the debt?
What would be the value of the merged company? What would be the value of the
(d)
merged company’s debt and equity?
Is there a transfer of wealth in this case? Why?
(e)
Suppose that the face value of Bentley’s debt was £100,000. Would this affect the
(f )
transfer of wealth?
Calculating NPV
36 Plant AG is considering making an offer to purchase Palmer AG. Plant’s vice-president of finance has collected the following information:
Plant Palmer
Price–earnings ratio 12.5 9
Shares outstanding 1,000,000 550,000
Earnings (C) 2,000,000 580,000
Dividends 600,000 290,000
Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5 per cent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 7 per cent per year.
What is the value of Palmer to Plant?
(a)
What would Plant’s gain be from this acquisition?
(b)
If Plant were to offer
(c) $18 in cash for each share of Palmer, what would the NPV of the acquisition be?
What is the most Plant should be willing to pay in cash per share for the equity of
(d)
Palmer?
If Plant were to offer 100,000 of its shares in exchange for the outstanding equity
(e)
of Palmer, what would the NPV be?
Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?
(f ) CHALLENGE
36–37
Questions and Problems