Question

Your company has earnings per share of $ 3. It has 1 million shares​ outstanding, each of which has a price of $ 38. You are thinking of buying​ TargetCo, which has earnings of $ 3 per​ share, 1 million shares​ outstanding, and a price per share of $ 26. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offered an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a 18 % premium to buy TargetCo.​ However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be 18 %​, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover​ (ignore time value of​ money). a. What is the price per share of the combined corporation immediately after the merger is​ completed? b. What is the price of your company immediately after the​ announcement? c. What is the price of TargetCo immediately after the​ announcement? d. What is the actual premium your company will​ pay?

Answer 1

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