Question

Firm A (acquirer) has 100 shares, worth $10 each. Firm B (target) has 100 shares with $12 each. If there is a synergy of $200 for a merger of the two and firm A intends to keep half of it, what is the number of shares of firm A to be exchanged for each of firm B’s shares?

Answer 1

Sol :

Number of shares Firm A = 100

Price per share Firm A = $10

Number of shares Firm B = 100

Price per share Firm B = $12

To determine number of shares of firm A to be exchanged for each of firm B’s shares is as follows,

Firm A value = 100 x $10 = $1000

Firm B value = 100 x $12 = $1200

Merger synergy offered by A = $200 (Firm A intends to keep half of it) so it will be $200/2 = $100

Now total cash offer by firm A for firm B = $1200 + $100 = $1300

Exchange ratio = Total cash offer by firm A for firm B / Firm A value

Exchange ratio = $1300 / $1000 = 1.3

Therefore number of shares of firm A to be exchanged for each of firm B’s shares will be,

Number of shares Firm A x Exchange ratio = 100 x 1.3 = 130 shares.

Firm A needs to offer 130 shares to exchange 100 shares of firm B OR 1.3 per share of firm A for 1 per share of firm B.