Slides 18-19: Cash and Stock acquisition calculation

A acquires B (A: acquiring firm, B: target firm)

Value of Firm B to Firm A: VB* = VB + V where: V is the synergy (incremental value)

Example:
Assume A and B are all-equity firms (no debt)
Firm A: 120 shares outstanding, current stock price = $1.5
VA = 120 shares * $1.5 = $180
Firm B: 100 shares outstanding, current stock price = $1
VB = $100
Incremental value from the acquisition is $70
V = $70
 VB* = $100 + $70 = $170

Cash acquisition: Firm A pays Firm B $140 in cash

NPV = VB* - cash paid = $30
VAB = VA + VB* - cash paid = $210
Number of shares outstanding after the acquisition = number of shares of Firm A
= 120 shares
Price per share after the acquisition = $210 / 120 shares = $1.75
Merger premium = Cash paid - VB = $40

Stock acquisition: Firm B is acquired by Firm A for $60 worth of Firm A’s stock
VAB = VA + VB* = $350
Number of new shares Firm A has to issue and give to the target’s shareholders =
$60 / $1.5 = 40 shares
Number of shares outstanding after the acquisition = 120 shares + 40 shares = 160
shares
Price per share after the acquisition = $350 / 160 shares = $2.1875
Purchase price = 40 shares * $2.1875 = $87.5
NPV = VB* - Purchase price = $82.50
Merger premium = Purchase price - VB = -$12.50

Another stock acquisition: For every one share of Firm B, shareholders of Firm B
receives half a share. So, the number of new shares Firm A has to issue and give
to the target’s shareholders = 100 shares x ½ = 50 shares.

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Slide 22: Defensive Tactics

1. Golden parachutes: are generous severance packages provided to

management in the event of a takeover. Golden parachutes can deter takeovers
by raising the cost of acquisition.

2. Standstill agreements: the acquirer, for a fee, agrees to limit its holdings in the
target firm. Often go with greenmail (targeted repurchase).

3. Greenmail (targeted repurchase): The target firm buys back its own stock from
a potential bidder, usually at a substantial premium, with the provision that the
seller of the shares promises not to acquire the company for a specified period.

4. Poison pills (share rights plans): have flip-in provision that massively dilutes
the potential bidder’s ownership position  greatly increases the cost of merger
to bidder.
First, rights to buy new stock are given to existing shareholders with the exercise
price much higher than the current stock price.
The flip-in provision is triggered when someone acquires 20% of common stock or
announces a tender offer in an unfriendly takeover attempt. After the flip-in
provision is triggered, holders of the rights can buy new stock at half price, but
rights held by the acquirer are voided.

5. White knight: A firm facing an unfriendly merger offer might arrange to be

acquired by a friendly suitor, commonly referred to as a white knight.

Slide 29: Equity carve-out and Spin-off

Equity carve-out: sells a minority interest (20% of shares or so) to the public
through an IPO. Equity carve-out is often used first to create an active market for
the shares.

Spin-off: distributes shares to the existing shareholders of the parent company.

Spin-off is often used as the 2nd step after the equity carve-out to spin-off the
remaining shares.