Solved: Charger Incorporated and Sparks Electrical

Company are competitors in the

Charger Incorporated and Sparks Electrical Company are competitors in the business of
electrical components distribution. Sparks is the smaller firm and has garnered the attention of
the management of Charger, as Sparks has taken away market share from the larger firm by
increasing its sales force over the past few years. Charger is considering a takeover offer for
Sparks and has asked you to serve on the acquisition valuation team that will turn into the due
diligence team if an offer is made and accepted. Given the following information and
assumptions:

a. Make your recommendation about whether or not the acquisition should be pursued.

b. Assume Sparks has accepted the takeover offer from Charger, and now the new subsidiary
must be consolidated within Charger’s financial statements. Taking Sparks’s most recent
balance sheet and a restated market value of assets of $295.6 million, calculate the goodwill
that must be booked for this transaction.

Assumptions:

• Sparks would become a wholly owned subsidiary of Charger.

• Revenues will continue to grow at 4.3% for the next five years and will level off at 4%
thereafter.

• Cost of goods sold will represent 95% of revenue going forward.

• Sales force layoffs will reduce SG&A expenses to $22 million next year with a 2% growth rate
going forward.

• These layoffs and other restructuring charges are expected to result in expensed restructuring
charges of $30 million, $15 million, and $5 million, respectively, over the next three years.

• Noncash expenses are expected to remain around $7 million going forward.

• Interest expenses are expected to remain around $11.5 million going forward.

• A tax rate of 31% is assumed going forward.

• Charger’s cost of equity is 12%.

• Sparks’s current market capitalization is $315.7 million.

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 • Charger will offer Sparks a takeover premium of 20% over current market capitalization.

Charger Incorporated and Sparks Electrical Company are competitors in the

ANSWER
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