company A plans on acquiring company B making a cash offer of $27 per share for

Question

company A plans on acquiring company B 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 of $800000. 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. IF 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 $800000.

yes.. company a will still experience an NPV gain, although company b will capture more of the economics value of the transaction.

Explanation / Answer

If the company A acquire 1 share of company B at $27, then 1,00,000 shares will cost to $27,00,000.

Otherwise if the company A acquires 1 share of company B at $20, then 1,00,000 shares will cost to $20,00,000.

So acquiring at $27 will exceeed $7,00,000 only which is less than $8,00,000.

Therefore company A will still experience an NVP gain, although company B will capture more of the economic values of the transaction.

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