Firm A buys Firm B equity for ¢65 million in cash (Cedi amounts below in ¢millio
ID: 2798653 • Letter: F
Question
Firm A buys Firm B equity for ¢65 million in cash (Cedi amounts below in ¢million). The stand-alone market value of firm A and B are PVa = ¢200 and PVb = ¢50 respectively while PVab= ¢275. Estimate the gain, cost and NPV of the transaction.
30) Purchase for Cash - Firm A buys Firm B equity for ¢130 million in cash (Cedi amounts below in ¢million). Also, PVa = ¢300; PVb= ¢70, PVab= ¢460. Estimate the gain, cost and NPV of the transaction.
Merger and Acquisition Purchase for Stock
Firm A buys Firm B equity for 0.325 million shares of firm A stock; A has 1.0 million shares outstanding before the merger (Cedi amounts below in ¢million. PVa= ¢200, PVb= ¢50 and PVab= ¢275. Synergistic gains is estimated to be ¢25 million.
Gain = PVab - (PVa+ PVb) = ¢25
X = the fraction of the firm A shares that will be owned by the firm B shareholders after the merger = [.325/1.325] since firm A pays .325 million shares to the firm B shareholders and has 1.325 million shares outstanding after the merger.
Cost = portion of Gain going to the firm B shareholders
= [Value of firm A stock paid to firm B shareholders] - PVb
= X (PVab) - PVb
= [.325/1.325] ¢275 - ¢50
= ¢17.45
NPV = portion of Gain going to the firm A shareholders
= Gain - Cost
= ¢25 - ¢17.45
= ¢7.55
Explanation / Answer
In a merger/ acquisition deal the acquirer's gain owing to the merger/acquisition is the value of the combined firm less the value of standalone acquirer. The cost is the value that the acquirer pays over and above the value of the target firm. The difference between the two values is the acquirer's NPV of the merger/acquisition deal.
(1)
Acquirer : Firm A and Target: Firm B
Standalone Value of A = PV(A) = $ 200 m and Standalone Value of B = PV(B) = $ 50 m. Combined Value of AB = PV(AB) =$ 275 m
Therefore, Gain = PV(AB) - (PV(A) + PV(B)) = 275 - (200 + 50) =$ 25 million
Cash Paid by A for B's Equity = $ 65 million.
Therefore, Cost of Acquisition to A = Cash Paid - PV(B) = 65 - 50 = $ 15 million
Therefore, Acquisition NPV to A = Gain - Cost = 25 - 15 = $ 10 million
(2)
Acquirer : Firm A and Target: Firm B
Standalone Value of A = PV(A) = $ 300 m and Standalone Value of B = PV(B) = $ 70 m. Combined Value of AB = PV(AB) =$ 460 m
Therefore, Gain = PV(AB) - (PV(A) + PV(B)) = 460 - (300 + 70) =$ 90 million
Cash Paid by A for B's Equity = $ 130 million.
Therefore, Cost of Acquisition to A = Cash Paid - PV(B) = 130 - 70 = $ 60 million
Therefore, Acquisition NPV to A = Gain - Cost = 90 - 60 = $ 30 million
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