First… stock merger mock q. explanation: >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> …calculate the value of the combined firm after the merger: Post merger value of the combined firm: VAT = VA + VT + S – C VA = $9,000 VT = $3,120 S = $600 C = $0 because no cash is changing hands The value of the combined firm is therefore VAT = $9,000 + $3,120 + $600 – 0 = $12,720 Next, to account for the dilution and find the price per share for the combined firm, PAT, divide the post merger value by the post merger number of shares outstanding. Since we are told that Aquirer would exchange 0.75 shares of its stock for each share of Target, the number of new shares issued is: 80 million shares × 0.75 = 60 million new shares So, This means the actual value of each share given to Target’s shareholders is $60.57 and the actual price paid for Target is: PT = (N × PAT) = (60 × $60.57) = $3,634.20 Target’s gain in the merger as the target is: GainT = TP = PT – VT = $3,634.20 – $3,120 = $514.20 Note that Target’s gain simply represents the takeover premium in the transaction. (Study Session 9, LOS 35.m) >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Now an example… 0.80 shares of A for each share of T. Pre-Merger Price per sh: Target = 33, Acquirer = 50 Shrs outstanding: Target = 15, Acquirer = 35 Value: Target = 495, Acquirer = 1750 1: Gain to Target assuming no synergies? Post merger value of the combined firm: VAT = VA + VT + S – C = 1750 + 495 + 0 - 0 = 2245 shares issued = 15 * 0.80 = 12 Combined value / share = 2245/(35 + 12) = 47.76 Actual value of each share given to Target’s shareholders is $47.76 therefore the actual price paid for Target is: PT = (N × PAT) = (12 × $47.76) = $573.2 Gain to Target = TP = PT - VT = 573.2 - 495 = 78.2 Gain to Target = 78.2 2: Gain to Acquirer assuming synergies of 105? Post merger value of the combined firm: VAT = VA + VT + S – C = 1750 + 495 + 105 - 0 = 2350 shares issued = 15 * 0.80 = 12 Combined value / share = 2350/(35 + 12) = 50 Actual value of each share given to Target’s shareholders is $50 therefore the actual price paid for Target is: PT = (N × PAT) = (12 × $50) = $600 Gain to Acquirer = S - TP = S - (PT - VT) = 105 - (600 - 495) = 0 Gain to Acquirer = 0
that is what I got! Thank God!
the questions here are in same order like in the Ex.??? then what what the options…A,B,C,D???
Where did you find the question paper from? Nice memory slouis. but they had asked what will be the value pre-merger.
That’s what I got, out of sheer luck
thought the consensus here is 105 for #1 and 0 for #2.
I’m not sure what an exam question or choice was. This is just an example to illustrate how to calculate the gains to an acquirer or target based on pre-merger mkt values. There was some confusion previously and the calc discussed differed from the procedure as I recalled it.
**Edit: in response to cp’s post. 1. 105 = (50 * .8 * 15M) - 495 This is incorrect as the PT is incorrect GainT = PT - VT the correct PT is outlined above. 2. 0 is the correct end result, however, the calc is not based on the TP from the previous q. The TP needs to be recalc-ed as described given the 105 synergy assumption. GainA = S - TP
Yes!!! I got the second one right then:) I actually calc’d that one and got the 0 result. But was running out of time, so i just picked 105 on the first one. 1 of 2 is fair when i expected 0/2.
78 and 0 is right
I’ll take 1/2 as well- I think I went 4/4 in the rest of the item set so… sigh… maybe I’ll make up for MP and other 1/5 disasters…
akanska Wrote: ------------------------------------------------------- > I’ll take 1/2 as well- I think I went 4/4 in the > rest of the item set so… sigh… maybe I’ll make > up for MP and other 1/5 disasters… what did you put for the independent audit bit?
I seem to remember getting 105, but know the math above is right, what am I missing??
doworkson Wrote: ------------------------------------------------------- > I seem to remember getting 105, but know the math > above is right, what am I missing?? you did not account for dilution you just did 0.8 * the Acq share price and then take away the difference i did the same and it was because the question said pre-take over values which made me do it diff to normal - The second was 0 though
I still think it has to be 78 and 27. In your example the acquirer would never recognize a gain from the synergies. From my point of view they paid a premium of 78 and they received the difference of 105-78 for a gain of 27.
I def remember calculating the value of the shares exchanged, maybe I did put 78. Time to retire until August I think.
Seb25 Wrote: ------------------------------------------------------- > akanska Wrote: > -------------------------------------------------- > ----- > > I’ll take 1/2 as well- I think I went 4/4 in > the > > rest of the item set so… sigh… maybe I’ll > make > > up for MP and other 1/5 disasters… > > > what did you put for the independent audit bit? I think I put they select the indep. auditor and they approve non-audit whatever… Don’t really remember the question that well… maybe I’m 4/6 then 
good point sbugrad89—i can’t remember how the question was worded. (ie. if they ended up getting 105 synergies after the shares were exchanged) i know the first is definitely 78.
The answer to the second question is absolutely zero. 100%. The math louis laid out is spot on.
akanska Wrote: ------------------------------------------------------- > Seb25 Wrote: > -------------------------------------------------- > ----- > > akanska Wrote: > > > -------------------------------------------------- > > > ----- > > > I’ll take 1/2 as well- I think I went 4/4 in > > the > > > rest of the item set so… sigh… maybe I’ll > > make > > > up for MP and other 1/5 disasters… > > > > > > what did you put for the independent audit bit? > > > I think I put they select the indep. auditor and > they approve non-audit whatever… > > Don’t really remember the question that well… > maybe I’m 4/6 then i said Yes to first and no to second - can’t remember either and don’t know what’s correct