Question

Gobi Desserts is bidding to take over Universal Puddings. Gobi has 3,500 shares outstanding, selling at $55 per share. Universal has 2,500 shares outstanding, selling at $22.50 a share. Gobi estimates the economic gain from the merger to be $22,500.

1. If Universal can be acquired for $25 a share, what is the NPV of the merger to Gobi?

2. What will Gobi sell for when the market learns that it plans to acquire Universal for $25 a share?

3. What will Universal sell for? Assume that the market expects the merger to go through without any further bidding.

4. What are the percentage gains to the shareholders of each firm?

5. Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, Gobi sells for $55, so instead of paying $25 cash, Gobi issues 0.45 of its shares for every Universal share acquired. What will be the price of the merged firm?

6. What is the NPV of the merger to Gobi when it uses an exchange of stock?

Answer 1

a. NPV of merger = Value received – Value paid

=2500*22.50 + 22,500 – 2500*25

= $16,250

b.Price = Current price + NPV per share

= 55 + 16250/3500

= $59.64 per share

c. Selling price = Price offered

i.e. $25 per share

d.% gain

Gobi = (59.64 – 55)/55 = 8.44%

Universal = (25 – 22.50)/22.50 = 11.11%

e.Price of merged firm = (Value of Gobi Shares + Value of Universal shares + Gain from merger)/Number of shares after merger

= (3500*55+2500*22.50 + 22500)/(3500+2500*0.45)

= $58.65 per share

f.NPV of merger = Value received – Value paid

= 2500*22.50 + 22500 – 58.65*2500*0.45

= $12,768.75

i.e. $12,769