CHAPTER 26
THE BIRDIE GOLF-HYBRID GOLF
MERGER
1. As with any other merger analysis, we need to examine the present value of the incremental cash
flows. The cash flow today from the acquisition is the acquisition costs plus the dividends paid
today, or:
Acquisition of Hybrid –$250,000,000
Using the information provided, we can determine the cash flows to Birdie Golf from acquiring
Hybrid Golf. All earnings not retained are paid as dividends, so the cash flows for the next five years
will be:
Year 1 Year 2 Year 3 Year 4 Year 5
Dividends from Hybrid $20,700,000 $5,000,000 $13,500,000 $19,950,000 $27,000,000
To discount the cash flows from the merger, we must discount each cash flow at the appropriate
discount rate. The terminal value of the company is subject to normal business risk and should be
Discoun
t
rate Year 1 Year 2 Year 3 Year 4 Year 5
Dividends 16.9% $17,707,442 $3,658,819 $8,450,652 $10,682,794 $12,367,765
And the NPV of the acquisition is:
CHAPTER 25 C-2
2. Since the acquisition is a positive NPV project, the most Birdie would offer is to increase the current
cash offer by the current NPV, or:
The highest share price is the total high offer price, divided by the shares outstanding, or:
3. To determine the current exchange ratio which would make a cash offer and a share offer equivalent,
we need to determine the new share price under the original cash offer. The new share price of Birdie
after the merger will be:
So, the exchange ratio which would make the cash offer and share offer equivalent is:
4. The highest exchange ratio Birdie would accept is an exchange ratio that results in a zero NPV
acquisition. This implies the share price of Birdie remains unchanged after the merger, so the
exchange ratio is:
CHAPTER 25 C-3