Debian’s management announced in the last conference call that a potential buyer, Fedora, Inc., is interested in buying Ubuntu, one of Debian’s divisions. Fedora has offered to pay $90 million cash to buy Ubuntu. Relevant information is provided in Exhibit 1.
Exhibit 1 Value of Ubuntu as a stand-alone business $78 million Value of Ubuntu to Debian $85 million Value of Fedora (5 million shares, $10 par) $132 million Value of Fedora and Ubuntu as a combined entity $135 million (post cash acquisition of Ubuntu)
Alternatively, Fedora is prepared to offer to buy Ubuntu by directly issuing to the shareholders of Debian a total of 3 million $10 par value shares that will rank equally with its existing shares.
Under Fedora’s stock offer, the economic impact on the current shareholders of Fedora is closest to:
Apply Va*=Va+Vt+S-C with the cash offer option, we will get synergy equal to $8. Apply the same formula with the stock offer scenario, we will get Va*=225 (note that cost will equal to $0 since we are using stock to acquire the target). The new number of shares will be 5+3=8M. take 225/8 to get the price after the merger, which is $28.125. Target gain= (28.125*3)-85= -0.625. Acquirer gain= synergy-target’s gain= 8+0.625= 8.625