Question

# Firm A (acquirer) has 100 shares, worth \$10 each. Firm B (target) has 100 shares with...

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?

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.

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