Mergers financed by cash

Merger financed by stock option:

Offer 1 share of Cislunar food against 3 shares of Targetco

Value goes to Targetco shareholder = 833333.33 x 49.85

Market value of Targetco
 Premium to Targetco
1,538,461.54 Primum is consider as cost to CF
NPV to CF = Economic gain - Cost
20,000,000 - 1,538,462.54
18,461,537.46

Cash purchase
Earnings 40,000,000
Cash 10,000,000
Other assets 202,000,000
Total assets 212,000,000
Price per share $ 49.25
Shares outstanding 10,000,000
Market value 492,500,000

Course after mid-term Final Exam 11th May 2021: Tuesday 8 to 11

Cost of capital MoC Exam: 10th May
Captial structure analysis
Dividend policy
Merger and acquisitions
 Benefit to Cislunar Foods Solution:
Increase in revenues 4,000,000
Cost of Capital 20%
Economic benefit 20,000,000

Payment of Targetco shareholders

Cislunar Foods offer to Targetco 19
Targetco shares outstanding 2,500,000
Payment of Targetco shareholders 47,500,000

Premium paid to Targetco shareholders

Payment made to Targetco shareholders 47,500,000 Q2.
Market value of Targetco 40,000,000
Premium paid to Targetco shareholders 7,500,000

Net benefit to Cislunar Foods

PV of economic benefit 20,000,000
less: Premium paid to Targetco (7,500,000)
Net benefit to Cislunar Foods 12,500,000

Post merger market value

Market value prior to merger 480,000,000
Market value of Targetco 40,000,000
Economic benefit 20,000,000
less: Payment made to Targetco (47,500,000)
Post merger market value 492,500,000

Price per share after merger

Post merger market value 492,500,000
Shares outstanding 10,000,000
Price per share after merger 49.25

$ 41,538,461.54
40,000,000
 1,538,461.54

Stock purchase
40,000,000
57,500,000
202,000,000
259,500,000
$ 49.85
10,833,333
540,000,000

5000
Reasons for consideration
Reduction in the operating cost by combining selling, marketing, and administrative expenses.
Increase in the revnues in Targetco region
$2 million dollars increase in the overall revenues.
$2 million dollars increase in the overall operating costs.
$4 million dollars increase in the cumullative earnings.

Economic gain = PV (increased earnings)

4000000 20000000
0.2
Targetco management and shareholders will not consider the marger unless they receive at least stand alone value of their sh

Solution:
Number of new shares issued to Targetco. 833333.3
Targetco shares outstanding 2,500,000
Ratio 3 to 1 3

New shares outstanding of Cislunar Foods after merger

Before merger shares outstanding 10,000,000
add: New shares issued Tc shareholders 833,333
New shares outstanding of Cislunar Foods after mer 10,833,333

Increase in earnings 4,000,000

Economic gain = 4000000/0.2 20,000,000

Earnings 40,000,000
Cash (55+2.5) 57,500,000
Other assets (185+17) 202,000,000
Total asset 259,500,000
Shares outstanding 10,833,333
Price per share
Market value
Prior to merger 480,000,000
add: TC market value 40,000,000
add: PV of gain 20,000,000
Total market value 540,000,000
Price per share = Total market value / Shares outstanding
$ 49.85
 National
Revenues 180
Operating costs 125
Earnings 55
Cash 85
Other assets book value 225
Total assets 310
Price per share 60
Number of shares 12,000,000
Market value 720,000,000
Cost of capital 18%
d alone value of their shares. Offer 24
Net increase in earnings
Increase in revenues 10,000,000
Decrease in cost 5,000,000
Net increase in earnings 15,000,000

Economic benefit to National shareholder

less: Premium to Sizzler shareholder
Net economic benefit to National

Payment to Sizzlers shareholders

Market value of Sizzler
Premium paid to Sizzler shareholders

Post merger market value of National:

Market value prior to merger
add: Market value of Sizzler
add: Economic benefit
less: Paid to Sizzler
Post merger market value
Price per share
Sizzler Combined
30 220 ,,+10
20 140 ,,-5
10 80 ,,+15
4
22
26
20
4,000,000 40,000,000
80,000,000

100,000,000
(16,000,000)
84,000,000

96,000,000
80,000,000
16,000,000

720,000,000
80,000,000
100,000,000
(96,000,000)
804,000,000
67
Example
Pre-merger data:
Acquiring shares outstanding 10,000,000
Acquiring share price 40
Acquiring value 400,000,000

Target:
Shares outstanding 5,000,000
Share price 20
Target value 100,000,000

Gain from merger 20,000,000

merger gain per share of target company
20,000,000/5,000,000 $ 4.00 per share
The acquiring company can pay up to $24 per share for target company, $4 above the current price
If acquiring pays this amount, the NPV of the merger to acquiring will be zero.

P/E ratio 12
Takeover target P/E ratio 8
 1 5
2 10
3 8
4 8
5 7.5
38.5

Acquiring: value = $400 million

P/E = 12
Earnings = $400 million/12 = $33.33 million
Target: value = $100 million
P/E = 8
Earnings = $100 million/8 = $12.50 million
Merged: value = $400 + $100 + $25 = $525 million
Current earnings = $33.33 + $12.50 = $45.83 million
P/E = $525/$45.83 = 11.46
The P/E of the merged firm is less than that of Acquiring.