Question

Firm A is acquiring Firm B. Firm A’s share price is $12 and Firm B's share price is $4. Both firms have 1 million shares outstanding. Firm A expects a discounted synergistic value of $2 million from the merger. If Firm A pays $5 million cash to Firm B's shareholders, what is the NPV of the acquisition?

Answer 1

Answer : Calculation of NPV of the acquistion :

Value of Firm A (before acquistion ) = Number of Shares * Price per share

= 1,000,000 * 12

= 12,000,000

Value of Firm B (before acquistion ) = Number of Shares * Price per share

= 1,000,000 * 4

= 4,000,000

Consideration paid = 5,000,000

Net Acquisition cost = Consideration paid - Value of Firm B (before acquistion )

= 5,000,000 - 4,000,000

= 1,000,000

Value of Firm A after acquistion = 12,000,000 + 5,000,000

= 17,000,000

Holding percentage of Firm A = 12,000,000/17,000,000

= 70.588235294%

Total Benefit from Acquisition = Discounted Synergy - Net Acquisition cost

= 2,000,000 - 1,000,000

= 1,000,000

NPV = Total Benefit from Acquisition * Holding percentage of Firm A

= 1,000,000 * 70.588235294%

= 705,882.35294