Question

Shown below is certain data for the Buyer and Target firms.

Buyer   Target
Standalone value $1,200   $ 300
Shares Outstanding   10   50

Buyer estimates the present value of synergies as $100. Buyer makes an all cash offer $450 for the stock of Target.

Calculate:

The gain for buyer (deal NPV)

The gain for the target (deal NPV)

Buyer's post-acquisition stock price per share

Answer 1

Standalone total value of buyer and target firm is 1200+ 300 (1500). They expect a synergy of 100 that would take the combined value to 1600 NPV.

Buyer makes an all cash offer of 450. If we assume this cash offer will be made by the buyer from its existing business only then 450 would be reduced from the value of existing business, 300(Value of Firm B) would be added to the value , plus synergy of 100 would be added.

Hence, post deal NPV of buyer is 1200 + 300 +100 -450 = 1150

Target Firm would receive 450

Gain for buyer = NPV after takeover - NPV before takeover = 1200 - 1150 = -50

Gain for Target= NPV after takeover - NPV before takeover = 450 - 300 = 150

Buyer post acquisition stock price = NPV after takeover / Number of shares = 1150 / 10 = 115