Question

The financial manager of Firm B is considering the possible purchase of Firm C. The manager...

The financial manager of Firm B is considering the possible purchase of Firm C. The manager would like to pay £840m to take over the Firm C and expects that the market value of the combined firm would be worth £6,750m. Based on the following basic data of Firm B and Firm C:
Firm B：
Market value of firm £5,520m
Number of shares 2m
Firm C
MV：£560m
number：1.2m

question： Suppose that Firm C is bought for cash, calculate the cost and NPV of the merger from Firm B’s viewpoint. Also, calculate the share price of the combined firm.
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Answer #1

Answer:

Market value of both the firms after the merger= £(5,520 + 560)m = £6080 m
Synergy = Potential additional benefit from the merger i.e.  £(6750 - 6080)m =  £670m

NPV to Firm B= Total combined value of the merged firm - Value of Firm B
NPV to Firm B= £(6750 - 5520)m = £1230m

Cash Consideration paid to Firm C = £840m
Market Value of Firm C = £560m

NPV to Firm C = Cash consideration - Market Value of Firm C
NPV to Firm C = £(840 - 560)m = £280m

Cost of the merger to Firm B = NPV to Firm C
Therefore, Cost of the merger to Firm B = £280m

Since we are not given the exhange ratio, so we assume it to be 1

Therefore, Share price of the combined firm = Total value of the combined firm / Total number of shares
Share price of the combined firm = 6750/3.2 = £2109.37

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