Question

Harrods PLC has a market value of £131 million and 4 million shares outstanding. Selfridge Department Store has a market value of £33 million and 2 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods's CFO concludes that the combined firm with synergy will be worth £179 million and Selfridge can be acquired at a premium of £10 million. a. If Harrods offers 1.2 million shares of its stock in exchange for the 2 million shares of Selfridge,

a. what will the stock price of Harrods be after the acquisition?

b. What exchange ratio between the two stocks would make the value of a stock offer equivalent to a cash offer of £43 million?

Answer 1

a. The stock price would be = Total value of firm/Total number of shares

The number of shares=4 million currently outstanding+1.2 million issued to Selfridge

=5.2 million

The value of the company is given as £179 million

Stock price after the acquisition = £179 million/5.2 million = £34.42

b). Value of Selfridge stockholders after merger = £43 million/ £179 million = 24.02%

24.02% = [New Shares Issued/(New Shares Issued + Old Shares)]

24.02% = [New Shares Issued/(New Shares Issued + 4 million)]

New Shares Issued = 24.02%x New Shares Issued + 0.96 million

0.7598xNew Shares Issued = 0.96 million

New Shares Issued = 0.96 million / 0.7598 = 1.26 million

Exchange ratio = New Shares Issued / Shares of Selfridge

= 1.26 million / 2 million = 0.6324

Hence, The proper exchange ratio should be 0.6324 to make the stock offer’s value to Selfridge equivalent to the cash offer.