Harrods Inc. has a market value of $360 million and 30 million shares outstanding. Selfridge Department Store has a market value of $144 million and 18 million shares outstanding. Harrods is contemplating acquiring Selfridge and expects the combined firm to be worth $540 million. Selfridge can be acquired at a premium of $15 million.
a.
If Harrods offers 11 million shares of its stock in
exchange for the 18 million shares of Selfridge, what
will the Harrods’ stock price be after the acquisition?
b.
What exchange ratio between the two stocks would make the stock offer value equal to a cash offer of
$159 million?
| a) | harrods total shares after acquisition | = | 18m+11m | ||||||
| = | 29m | ||||||||
| Harrods total value after acquisition | = | $540m | |||||||
| Share price after acquisition | = | 540m/9m | |||||||
| = | $18.62 | ||||||||
| b) | Value before acquisition (harrods) | = | 360m/30m | ||||||
| = | $12 per share | ||||||||
| Value of selfridge after premium | = | 159m/18m | |||||||
| = | $8.8333 per share | ||||||||
| Share exchange ratio | = | 8.8333/12 | |||||||
| = | 0.7361 | ||||||||
| harrods should issue its 0.7361 shares for every share of selfridge | |||||||||
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