An acquirer has an issued capital of 300 million shares trading at $6.01. A target company has an issued capital of 500 million shares trading at $2.95. The acquirer expects synergies from an acquisition with a present value of $300 million and offers target company shareholders 0.5 acquirer shares for each target company share. What is the likely post-announcement price of target company stock (to two decimal places)?
Number of shares in acquiring company= 300 m
Value per share of acquiring company= 6.01
Number of shares in target company= 500 m
Value per share of target company= 2.95
Synergy due to aquisition = 300 m
Now we can find the value of acquiring company and target company as follows:-
Value of acquiring company (Va)=
Value of target company (Vt)= 500*2.95= 1475
Number of shares issued by acquiring company to target company= 300*0.5 = 150 m
Total number of shares after acquisition = 300+150= 450 m
Post merger share price = (Va+Vt+Synergy)/total number of shares after merger
Each one share of acquiring company is equal to 0.5 shares of targeting company, so price of targeting company shares after maerger
= 7.95*0.5 = 3.975
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