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Acme Alarm Systems Case 31
Merger Terms and Stock Price
Purpose: The case is structured so that the student can analyze the effect of a merger on earnings per
share and stock price. In doing the analysis, the student will see that a high premium over market value
for a target company will dilute earnings per share. The question then becomes, will there be a
potentially higher P/E ratio for the acquiring company due to improved growth prospects? Also, what
part will synergy play in the analysis?
Relation to Text: The case should follow Chapter 20.
Complexity: The case is moderately complex. It should require 45 minutes to an hour.
Solutions
1. Becky should argue that the initial dilution in earnings per share can be justified by the
2. New stock price.
Since the new stock price of $38.82 is below the premerger stock price of $40, Andrew
should not be satisfied.
3. New earnings per share.
$60 million x 1.10 = $66 million new total earnings.
Since the new stock price of $42.69 is above the premerger stock price of $40, Andrew
should be satisfied.
4. New price per share for Internet Security.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
New total price
Number of premerger Acme shares that must be issued.
Postmerger earnings per share for Acme.
*20 million original Acme shares plus 9.6 million new shares.
New stock price
satisfied.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
