Company A plans on acquiring Company B by making a cash offer of $ 27 per share

Question

Company A plans on acquiring Company B by making a cash offer of $ 27 per share for all 100,000 shares of Company B.

Company A estimates that the merger will produce cost savings with a present value (PV) of $ 800,000.

Recently Company B's stock increased in price from $ 20 to $ 24 per share based on good operating results. Company A estimates that Company B's fair market value is $ 24 per share. The CFO of Company A has suggested a reevaluation of its offer for Company B, pointing out that the true stand-alone value of Company B may be $ 20 per share and not $ 24 per share and certainly not the offer price of $ 27 per share.

f he is correct that the fair market value for Company B is $ 20 per share, will the merger generate a positive NPV for Company A ?

Pick one of the two answers and explain your choice in a few sentences.

NO...The cost to acquire Company B stock at $ 27 per share will exceed the post-merger gain of $ 800,000

YES...Company A will still experience an NPV gain, although Company B will capture more of the economic value of the transaction.

Explanation / Answer

YES...Company A will still experience an NPV gain, although Company B will capture more of the economic value of the transaction.

because company A estimate that post the merger will produce cost savings with a present value (PV) of $ 800,000.

It also stated that company B's fair market value is 20 and its going to pay 27 so it is paying 7 more per share and share count is 100000 so company A will pay 700000(7*100000) more than actual fair value. It will have cost benefit of PV800000 thats why 800000 - 700000 = 100000 company A will gain NPV of 100000 and not economic value creation

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