Company A, B, C is contemplating taking over company XYZ. One of the argument s

Question

Company A, B, C is contemplating taking over company XYZ. One of the argument s put forward by the president of ABC is to undertake diversification to reduce risk. Firm ABC is worth $30m and XYZ is worth $80m. ABC can acquire XYZ at a cost of 120m. Assume a post merge cost of capital of 10%. The merger will result in cost saving of up to $6m every year. a) What is cost of the merger to ABC b) What is the NPV of the merger c) What is the benefit of the merger to shareholders of XZY d) What is the total value of the merged firm e) Comment on the argument put forward by the ABC CEO

Explanation / Answer

As per rules I will answer the first 4 sub parts of this question

1: Cost of merger= Amount paid to acquire XYZ = $120 m

2: NPV of merger = -Premium + Cash flows

= -(120-80) m + 6m/10%

= -40m + 60m

= $20 million

3: Benefit to shareholders of XYZ= Premium received

= (120 – 80)m = $40 m

4: Total value of merged firm = Value of assets of ABC + Assets of XYZ + Goodwill/Premium

= $30m + $80m + $40m

= $150 million

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