THE BIRDIE GOLF-HYBRID GOLF MERGER

Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of ne
$352 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and the companies believe a
economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expens
been instrumental in the merger negotiations. Bryce has prepared the following pro forma financial statements for Hybr
statements include all synergistic benefits from the merger:

2019 2020 2021

Sales 409,600,000 460,800,000 512,000,000
Production Cost 287,400,000 332,500,000 358,400,000
Depreciation 38,400,000 40,900,000 42,300,000
Other expenses 40,900,000 46,100,000 51,200,000
EBIT 42,900,000 41,300,000 60,100,000
Interest 9,730,000 11,260,000 12,300,000
Taxable Income 33,170,000 30,040,000 47,800,000
Taxes (25%) 8,292,500 7,510,000 11,950,000
Net Income 24,877,500 22,530,000 35,850,000

Bryce also is aware that the Hybrid Golf division will require investments each year for continuing operations, along with
required investments and sources of financing:

2019 2020 2021

Investments
Net Working Capital 10,200,000 12,800,000 12,800,000
Fixed Assets 7,700,000 13,800,000 9,300,000
Total 17,900,000 26,600,000 22,100,000

Sources of Financing 2020 2021

New Debt 17,900,000 9,200,000 8,200,000
Profit Retention 0 17,400,000 13,900,000
Total 17,900,000 26,600,000 22,100,000

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not optimal. If the merger takes place, H
$57 million debt issue, which would be followed by a $76 million dividend payment to Birdie Golf. This will increase Hyb
will be able to use a $12.8 million tax loss carryforward in both 2019 and 2020 from Hybrid Golf’s previous operations.
million in five years, and the company will have $153.6 million in debt at that time. Stock in Birdie Golf currently sells for
shares of stock outstanding. Hybrid Golf has 5.2 million shares of stock outstanding. Both companies can borrow at an
and the expected return on the market is 13 percent. Bryce believes the current cost of capital for Birdie Golf is 11 perc
structure is 1.30.

Bryce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer

1. Suppose Hybrid shareholders will agree to a merger price of $63.25 per share. Should Birdie proceed with the merge
2. What is the highest price per share that Birdie should be willing to pay for Hybrid?
3. Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio wou
equivalent to the original merger price of $63.25 per share?
4. What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?

Given:
Cash Offer for Hybrid ₱352,000,000
Merger Price ₱63
Debt issue of Hybrid ₱57,000,000
Dividend payment to Birdie ₱76,000,000
Tax loss carryforward (2019 & 2020) ₱12,800,000
Terminal Value of Hybrid in 5 years ₱460,800,000
Debt in 5 years ₱153,600,000
Birdie Gold ₱94
Birdie Golf Shares Outstanding 11,600,000.00
Hybrid Golf Shares Outstanding 5,200,000.00
Interest Rate 8%
Risk Free Rate 6%
Expected return on the market 13%
Cost of capital for Birdie Gold 11%

Solution:
1. Suppose Hybrid shareholders will agree to a merger price of $63.25 per share. Should Birdie proceed with the merge

Step 1: Determine the relevant cash flows.

Cash Flows 2018 2019 2020

Acquisition Cost -352000000
Dividends from Hybrid 76000000 24,877,500 5,130,000
Tax Loss Carry Forward 12800000 12800000
Equity Value of Hybrid
Debt Value of Hybrid

Step 2: Compute the appropriate discount rate for each cash flow.

Current Weight of Debt 0.33

Current Weight of Equity 0.67

Beta of Hybrid's Debt

Cost of Borrowing 8%
Risk Free Rate 6%
Expected return of the market 13%
Ɓ of Debt 29%

Hybrid Overall Beta

Current Weight of Debt 0.33
Beta of Hybrid Debt 0.29
After merger weight of equity 0.67
Beta of Hybrid equity 1.30
Overall Ɓ 0.96

Hybrid Required Return

Risk Free Rate 6%
Hybrid Overall Beta 0.96
Expected Return of the Market 13%
Required Return 12.73%

New Beta of Hybrid equity

Overall Ɓ 0.96
New Weight of Debt 0.50
New Weight of Equity 0.50
Old Weight of Debt 0.33
New Beta of Equity 1.59

New Discount Rate for Dividends

Risk Free Rate 6%
New Beta of Equity 1.59
Expected Return of the Market 13%
New Discount Rate 17.13%

Step 3: Calculate the Net Present Value of the merger.

Cash Flows Discount Rate 2018 2019

Acquisition Cost 0- 352,000,000
Dividends from Hybrid 17.13% 76,000,000 24,877,500
Tax Loss Carry Forward 8% 12,800,000
Equity Value of Hybrid 12.73% 0
Debt Value of Hybrid 8% 0

Given that the NPV of the Cash Flows associated with the merger is negative, Birdie should not continue with t

2. What is the highest price per share that Birdie should be willing to pay for Hybrid?

Current Negotiation Price 352,000,000

NPV of Cash Flows - 42,522,168
Highest Price to Offer 309,477,832
Number of Hybrid Shares 5,200,000
Highest Price per Share ₱59.51

The highest price per share that Birdie should be willing to pay Hybrid is 59.51.

What exchange ratio would make the merger terms equivalent to the original merger price of $63.25 per share?

Share Price of Birdie Golf ₱94.00

Number of Shares Outstanding 11,600,000
NPV - 42,522,168
New Merger Price per share ₱90.33
Original Merger Price Per Share ₱63.25
Exchange Ratio 70.02%

The exhange ratio that will make the merger terms equivalent to the Original Merger Price per Share is 70.02%.

4. What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?

Original Merger Price Per Share ₱63.25

Share Price of Birdie Golf ₱94.00
Highest Exchange Ratio for Birdie 67.29%

The highes exchange ratio that Birdie would be willing to pay is at 67.29%
 ter several rounds of negotiations, the offer under discussion is a cash offer of
he companies believe a merger will result in significant synergies due to
nd administrative expenses. Bryce Bichon, the financial officer for Birdie, has
cial statements for Hybrid Golf assuming the merger takes place. The financial

2022 2023
576,000,000 640,000,000
404,500,000 451,200,000
42,500,000 43,900,000
57,900,000 63,100,000
71,100,000 81,800,000
12,800,000 13,800,000
58,300,000 68,000,000
14,575,000 17,000,000
43,725,000 51,000,000

ng operations, along with sources of financing. The following table outlines the

2022 2023

15,400,000 15,400,000
31,400,000 3,900,000
46,800,000 19,300,000

2022 2023
15,000,000 6,100,000
31,800,000 13,200,000
46,800,000 19,300,000

e merger takes place, Hybrid Golf will immediately increase its leverage with a
f. This will increase Hybrid’s debt-equity ratio from .50 to 1.00. Birdie Golf also
f’s previous operations. The total value of Hybrid Golf is expected to be $460.8
e Golf currently sells for $94 per share, and the company has 11.6 million
anies can borrow at an 8 percent interest rate. The risk-free rate is 6 percent,
or Birdie Golf is 11 percent. The beta for Hybrid Golf stock at its current capital

as asked you to answer the following questions:

proceed with the merger?

hat exchange ratio would make the merger terms

proceed with the merger?

2021 2022 2023

21,950,000 11,925,000 37,800,000

460800000
-153600000

2020 2021 2022 2023

 5,130,000 21,950,000 11,925,000 37,800,000
12,800,000 0 0 0
0 0 0 460,800,000
0 0 0 -153,600,000
Net Present Value:
uld not continue with the acquistion.

3.25 per share?

e per Share is 70.02%.

 PV in 2018 (Current Year)
- 352,000,000
 138,113,758
22,825,789
253,075,864
- 104,537,579
- 42,522,168