110. Energetic Inc., believes that it can acquire Satisfied Industries and improve efficiency to
the extent that the market value of Satisfied will increase by $5 million. Satisfied currently sells
for $20 a share, and there are 1 million shares outstanding.
a. Satisfied’s management is willing to accept a cash offer of $25 a share. Can the merger be
accomplished on a friendly basis?
b. What will happen if Satisfied’s management holds out for an offer of $28 a share?
111. Why is it stated that the safest way of evaluating the potential gains from a merger is to
focus on the changes in cash flow that will transpire as a result of the merger?
112. Discuss how tactics such as shark repellents or poison pills accomplish their intent.
113. Who are typically the primary beneficiaries in a merger?
114. One common explanation for the success of MBOs is the incentive effect of leverage.
Explain.
115. How are the gains from mergers distributed between the shareholders of the acquired
and acquiring firms?
116. For firms in a mature stage of life with free cash flow, do you accept the charge that
there might be some actual incentive to waste cash?
117. In what ways can companies change the composition of their ownership or
management?
118. GrowFast currently sells at a price-earnings multiple of 10. The firm has 2 million shares
outstanding, and sells at a price per share of $40. Steady & Stable has a P/E multiple of 8, has 1
million shares outstanding, and sells at a price per share of $20.
a. If GrowFast acquires the other firm by exchanging one of its shares for every two of Steady &
Stable’s, what will be the earnings per share of the merged firm?
b. If the merger has no economic gain, what will be the P/E of the new firm? What will happen to
GrowFast’s price per share? Will any of the shareholders experience a change in wealth?
c. What will happen to GrowFast’s price per share if the market does not realize that the P/E
ratio of the merged firm ought to differ from GrowFast’s premerger ratio? Who gains and by how
much in this case?
119. World Enterprises is determined to report earnings per share of $2.67. It therefore
acquires the Axle Company:
There are no gains from the merger. In exchange for Axle shares, World Enterprises issues just
enough of its own shares to ensure its $2.67 earnings per share objective.
a. Complete the above table for the merged firm.
b. How many shares of World Enterprises are exchanged for each share of Axle?
c. What is the cost of the merger to World Enterprises?
d. What is the change in the total market value of those World Enterprises shares that were
outstanding before the merger?
