The Hector Corporation is acquiring the Springing Corporation. Neither firm has
ID: 2618288 • Letter: T
Question
The Hector Corporation is acquiring the Springing Corporation. Neither firm has any debt outstanding. Hector has 90 million shares of stock outstanding with a market price of $20 per share. Springing has 60 million shares of stock outstanding with a market price of $10 per share. Hector’s managers estimate the benefits of synergy to have a present value of $120 million.
a. What is the estimated market value of the combined companies?
b. Suppose Hector pays $650 million in cash to buy 100 percent of the common stock of Springing. What is the NPV of the merger?
c. If Hector offers 1 share of Hector’s stock for every 2 shares of Springing stock, what is the NPV of the merger?
Explanation / Answer
(i) Price per share of Hector = $ 20, Number of Outstanding Shares = 90 million
Market Capitalization of Hector = 20 x 90 = $ 1800 million
Price per share of Springing Corporation = $ 10, Number of Outstanding Shares = 60 million
Market Capitalization of Springing = 10 x 60 = $ 600 million
Acquisition Synergy =$ 120 million
Combined Firm Value = 1800 + 600 + 120 = $ 2520 million
(ii) Cost of Merger to Hector = Cash Paid - Market Capitalization of Springing = 650 - 600 million = $ 50 million
Merger Gains = $ 120 million
Merger NPV = Merger Gains - Cost of Merger = 120 - 50 = $ 70 million
(iii) If Hector offers one share per two shares of Springing, then Hector has to issue 30 million (half of Springing's total outstanding shares) new shares of its own.
Combined Firm Value = $ 2520 million
Post Merger Share price of Hector = 2520 / (Initial outstanding share quantity + newly issued share quantity) = 2520 / (90 + 30) = $ 21
Merger Consideration Paid = 21 x 30 = $ 630 million
Merger Cost to Hector = Merger Consideration - Springing's Original Value = 630 - 600 = $ 30 million
Merger Gains = $ 120 million
Merger NPV = 120 - 30 = $ 90 million
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