More Examples to Increase Familiarity with Synergy Split and Share Exchange Offers

QUESTION:
Two firms are going to merge.
- The acquirer is an all-equity firm with 500,000 shares valued at $20 per share, for a
total market value of equity of $10,000,000 (500,000 shares * $20/share). As the firm
is all equity, the total market value of equity is equal to the total market value of the
firm.
- The acquirer has one project, the PV of which is $2,000,000, and $8,000,000 in cash.
- The target is an all-equity firm with 1,000,000 shares valued at $7 per share.
- The target has one project, the value of which is $7,000,000. The NPV of the
synergies is $5,000,000.

PART A: Suppose that the acquirer pays for the acquisition in cash and offers to transfer all
its cash on hand to the target shareholders as the full offer price for all the target shares.
- How much will the acquirer pay per share of the target firm?

$ 8 000 000
Pay per share= =$ 8
1 000 000

- What is the value of the newly combined firm?

V =V A +V T +V SYNERGIES

V = (500 000∗$ 20 ) + ( 1 000 000∗7 $ ) −8 000 000+5 000 000

V =10000 000+ 7 000 000−8 000 000+5 000 000=14 000 000

- How is the NPV of the synergies split b/w the (original) shareholders of the acquirer
and the (original) shareholders of the target?

The New Shareholders get the NPV =( 1 000 000 )∗( $ 8−$ 7 )=$ 1 000 000

The Acquier shareholders =5 000 000−1 000 000=4 000 000

PART B: Suppose the acquirer is willing to offer the target shares in the merged firm as
consideration for the acquisition. The acquirer is ready to allow the target to keep 60% of
the expected synergies. How many shares will the acquirer issue to the target?

What will be the share exchange ratio (share offered to target to shares retired by target)?

Target get 60 % of Synegies=60 %∗5 000 000=3 000 000

V A =10 000 000+7 000 000−8 000 000+40 %∗5 000 000=12 000 000

12 000 000
V A= =$ 24 per share
500 000

V T =$ 7∗1 000 000+60 %∗5 000 000=$ 10 000000

Stock Issue:

$ 10 000 000
Stock issued= =416 666.67 shares
$ 24

416 666.67
Exchange Ratio= =0.4167
1 000 000

PART C: Now, suppose that the acquirer pays for the acquisition with $4,000,000 in cash and
with newly issued shares. Specifically, in addition to the cash (which is paid directly to the
shareholders of the target), the acquirer offers the shareholders of the target 1 share in the
newly combined firm in exchange for 4 shares in the old target firm.
- What is the value of the newly combined firm?

V =V A +V T + Synergies

V =10000 000+ 7 000 000−4 000 000+5 000 000=1 8 000 000

- What is the percentage of the newly combined firm held by the (original) target
shareholders?

250 000
% of new shareholders= =33 %
500 000+250 000
 - How is the NPV of the synergies split between the (original) shareholders of the
acquirer and the (original) shareholders of the target?

The New Shareholders get the NPV =( 4 000 000 ) +33 %∗18 000 000−7 000 000

¿ 3 000 000

The Acqur ier shareholders=5 000 000−3 000 000=2 000 000

PART D: Now, suppose that upon deeper investigation of the financial data, the acquirer
discovers that:
- There will not be any synergies from the deal.
- In addition, it seems that the current market price of a share of the target firm ($7)
may not capture the true value of its underlying project.
- In particular, the underlying project of the target firm is expected to yield $1,000,000
every year forever, starting today (i.e., at t=0).
- The discount rate of the acquirer is 9%, whereas the discount rate of the target is
11%.
- Suppose that the acquirer is paying for the acquisition only with newly issued shares.
- What is the maximum number of shares the acquirer should be willing to issue to
the shareholders of the target to finance the acquisition?

The value of the target firm:

$ 1000 00
V T =$ 1000 000+ =$ 10 090 909
0.11

Combined firm=$ 10090 909+ $ 20∗500 000=$ 20 090 909

Before the acquisition, shareholders of the acquirer owned value of $10,000,000. Thus, the
maximum number of shares they are willing to issue will leave them with the same value.
Denoting the maximum number of shares issued as m, we get:

( m+500000
500000 )
∗$ 20 090 909 → m=504 545