Exercise: Merge and Acquisition

1/Consider the following premerger information about firm X and firm Y:

Firm X Firm Y
Total earnings $105,000 $48,300

Shares outstanding 43,900 33,000

Per share values:
Market $53 $19
Book 21 $9

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at
a merger premium of $5 per share. Assuming that neither firm has any debt before or
after the merger, construct the postmerger balance sheet for Firm X assuming the use
of the purchase accounting method.

2/ Assume that the following balance sheets are stated at book value. Suppose that
Jurion Co. purchases James, Inc. Then suppose the fair market value of James’s fixed
assets is $23,000 versus the $13,300 book value shown. Jurion pays $30,400 for
James and raises the needed funds through an issue of longterm debt. Construct the
postmerger balance sheet under the purchase method of accounting.

Jurion Co.
Current assets $27,000 Current liabilities $7,700
Net fixed assets 49,000 Long-term debt 13,800
Equity 54,500
Total $76,000 Total $76,000
James, Inc.
Current assets $5,200 Current liabilities $3,300
Net fixed assets 13,300 Long-term debt 2,100
Equity 113,100
Total $18,500 Total $18,500

3/ The shareholders of Flannery Company have voted in favor of a buyout offer from
Stultz Corporation. Information about each firm is given below. Flannery’s
shareholders will receive one share of Stultz stock for every three shares they hold
in Flannery.
a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV
of the acquisition is zero?
b. What must Stultz feel is the value of the synergy between these two firms? Explain
how your answer can be reconciled with the decision to go ahead with the takeover.

Flannery Stultz
 Price -earnings ratio 6.35 12.70
Shares outstanding 73,000 146,000
Earnings $230,000 $690,000

4/ Shuster merges with Leverne. Shuster agrees to exchange 25 of its shares for
every 50 of Leverne's old shares, so that Shuster will have 75 shares available after
the merger. There is no synergy. Calculate the EPS along with other information
below for the combined firm in two cases; one where the market is smart, and
another when the market is fooled.

5/ Firms A and B, both of which are 100% equity, are going to merge. Before the
merger, Firm A (100 shares outstanding) is worth $15,000. Firm B (50 shares
outstanding) is worth $10,000. The combined firm is worth $30,000. Firm A will pay
$11,500 in cash for Firm B. What is the NPV of the merger to Firm A?

6/ Dexter Department Stores has a market value of $400 million and 20 million
shares outstanding. Walnut Stores has a market value of $134 million and 13.4
million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top
management of Dexter's have determined that due to the synergies between the
firms the combination will worth $667 million. Dexter expect to pay a $67 million
premium for Walnut Stores.
If Dexter offers 10 million shares in exchange for the 13.4 million shares of Walnut,
what will the exchange ratio and the equivalent cash value?

7/ Dexter Department Stores has a market value of $400 million and 20 million
shares outstanding. Walnut Stores has a market value of $134 million and 13.4
million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top
management of Dexter's have determined that due to the synergies between the
firms the combination will worth $667 million. Dexter expect to pay a $67 million
premium for Walnut Stores.
If Dexter offers 10 million shares in exchange for the 13.4 million shares of Walnut,
what will the after acquisition stock price of Dexter be?

8/ Mirandel Inc. is considering the acquisition of Tarantel Corp. Mirandel's earnings

after tax are $2 million, it has two million shares outstanding, and its price-to-
earnings ratio (PER) is 20. Tarantel's earnings are $1.5 million, it has 0.5 million
shares, and its PER is 15. Mirandel's earnings and dividends are expected to grow
at a constant rate of 5 percent per year. With the acquisition of Tarantel, the growth
rate is expected to increase to 8 percent.
a. If Mirandel's current dividend per share is $1.50, what is Mirandel's cost of
equity capital if its dividend per share grows at a constant rate of 5 percent
forever?(Hint: Mirandel's share price is the present value of a dividend per share
growing at a constant rate forever.)
b. What is the value of Tarantel for Mirandel's shareholders?
c. What will the net present value of the acquisition be if Mirandel offers $50 in
cash for each outstanding share of Tarantel? What if it offers 756,000 of its shares in
exchange for all the outstanding shares of Tarantel? Should Mirandel make a cash
or a share exchange offer?

9/ Osiris Inc. is considering the acquisition of a competitor, Polos Corp. Osiris

expects that the purchase would add $800,000 to its annual cash flow from assets
indefinitely. Both firms are fully equity financed and do not carry any debt. The
current market value of Osiris is $50 million, and that of Polos is $30 million. Osiris's
cost of capital is 8 percent. Osiris hesitates between offering $20 million in cash and
offering 25 percent of its shares to Polos's shareholders.
a. What is the value of the acquisition to Osiris?
b. What is the cost of Polos to Osiris under each alternative?
c. What is the net present value of the purchase to Osiris? exchange offer?

10/ Mergecandor Corp. is considering the acquisition of Tenderon Inc. Mergecandor

has two million shares outstanding selling at $30, or 7.5 times its earnings per share,
and Tenderon has one million shares outstanding selling at $15, or five times its
earnings per share. Mergecandor would offer to exchange two shares of Tenderon
for one share of Mergecandor.
a. If there would be no wealth created from the merger, what would be the
earnings19.02per share of the merged firm? Its price-to-earnings ratio (PER)? Its
share price?Would there be any wealth transfer between the shareholders of the two
companies?

b. Suppose that, after the merger, the market would not adjust the PER of Merge-
candor, which will stay at 7.5. What would be the new share price of the mergedassy
r9g in firm? Would there be any wealth transfer between the shareholders of the
twocompanies?

11/ Maltonese Inc. has five million shares outstanding selling at $60 each, and its
price-to-earnings ratio (PER) is 10. Targeton Corp. has 1.5 million shares
outstanding with a market price of $30 each, and its PER is. Maltonese is
considering the acquistion of Targeton because it expects that the merger will create
$15 million of value.
a. What is the maximum price that Maltonese should pay for one share of Targeton?
b. What would be the PER of the merged firm if Maltonese issues new shares to
finance the acquisition, with Targeton shareholders receiving one Maltonese share
for two Targeton shares?

12/ Cholern Electric Company (CEC) is a public utility that provides electricity to the
central Colorado area. Recent events at its Mile-High Nuclear Station have been
discouraging. Several shareholders have expressed concern over last year’s
financial statements.
Recently, a wealthy group of individuals has offered to purchase half of CEC’s
assets at fair market price. Management recommends that this offer be accepted
because “We believe our expertise in the energy industry can be better exploited by
CEC if we sell our electricity generating and transmission assets and enter the
telecommunications business. Although telecommunications is a riskier business
than providing electricity as a public utility, it is also potentially very profitable.”
Should the management approve this transaction? Why or why not?