Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that neither firm has any debt outstanding.
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,500. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28 per share in cash?
The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus the acquisition costs, so:
NPV = 1,200 ($26) + $2,500 - 1,200($28) = $100 |
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Consider the following premerger information about Firm A and Firm B:
Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger?
Cost of acquisition = 210 ($25) = $5,250
Since the stock price of the acquiring firm is $40, the firm will have to give up: Shares offered = $5,250/$40 = 131.25 shares The EPS of the merged firm will be the combined earnings of the existing firms divided by the new shares outstanding, so: EPS = ($930 + $650)/(620 + 131.25) = $2.10 |
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