Mergers just seems to give me fits. I’m not sure why as it seems pretty straight forward. But I always get confused as to whether the value goes to the acquirer or the target. Going to try to sort out this mess once and for all this afternoon.
If I remember correctly, basically the value to the target is just the Price Paid-Fair Value(takeover premium), and the gain to the target are the synergies-takeover premium. I always get confused though when I see a merger problem though…
value of the combined firm = value of target + value of acquirer + synergies - cash paid and what lance said… gain to acquirer = synergies - t/o premium gain to target = t/o premium
Value before Takeover of T: PT Value before Takeover of Aq: PA Synergy: S Value after Takeover = PT+PA+S Cost is equal to C Gain is what you have after takeover - what you had before: Gain of A: (PT+PA+S)-C-PA= PT+S-C Gain of T: C - PT
Doesn’t this all assume it is a cash deal. Rules change when it is a stock deal.
I got a qbank on mergers - purchase and pooling regarding what kind of cash flows are involved if you pay in cash if you use common stock or if you issue debt apparently for pooling- that is common stock there is no cash flow- makes sense for cash - it’s an investing outflow for cash by issuing debt- investing outflow and financing inflow hope I remembered it the way it was lol
Big Steel is considering making a bid for Small Steel. The following data applies to the analysis: ------------------------------------Big Steel----------------------Small Steel Pre-merger stock price-----------$75---------------------------$100 Number of shares outstanding–500m-------------------------40m Pre-merger market value-------$37,500m-------------------$4,000m Estimated synergies--------------------------------$600m If Big Steel buys Small Steel by exchanging 1.45 shares of its stock for each share of Small Steel, what are the gains to Big Steel and Small Steel, respectively? —Big Steel------------------Small Steel A) $100.8m--------------------$491.3m B) $246.2m--------------------$353.8m C) $353.8m--------------------$246.2m D) $223.9m--------------------$376.1m
I’ll pat myself on the back for the formatting. That came out good haha.
Yup, you have to calculate the cost based on the shares issued: 1) Take the exchange ratio, multiply by the target’s outstanding shares to find the number of shares to issue to give to the target as payment, add that to the acquirer’s shares for the combined entity’s shares. 2) Add the value of the target, acquirer and synergies. 3) Divide combined value by new share count. 4) Multiply this per share value times the shares issued to get your cost.
D?
mwvt9 Wrote: ------------------------------------------------------- > Doesn’t this all assume it is a cash deal. > > Rules change when it is a stock deal. you are correct. the formula should be modified for stock deal.
D for sureish
Pinkman, this was for you. I’ll wait a little longer to post up the answer.
d for me too… after looking at doworkson’s post…
D is correct, Value after takeover = $37,500 + $4,000 + $600 = $42,100m. Shares exchanged for Small Steel = 1.45 x 40m = 58m. Post-takeover share price = value after takeover / shares outstanding = 42,100m / 558m = $75.45. Takeover price = number of shares to small steel x post-takeover share price = 58m x $75.45 = $4,376.1m. Gains to Small Steel = takeover premium = $4,376.1 – $4,000 = $376.1m. Gains to Big Steel = synergies – takeover premium = $600 – $376.1 = $223.9m.
I remember this one now… Great question. CFAI… Please only ask about CASH mergers… 