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National Brands vs. A-1 Holdings Case 34
Merger Analysis
Purpose: This case features a surprise attack tender offer. The acquisition candidate decides to counter
with a Pac Man defense in which they make an offer for the potential acquiring company. Both firms are
considering various financing packages to establish their strategy including heavy leverage and the use of
acquired assets as collateral. The student must consider the feasibility of the plans as well as the impact
on stockholder wealth maximization. The student is also asked to consider social responsibility (good
guy versus bad guy) issues related to the merger.
Relation to Text: The case should follow Chapter 20. Because the case covers many important questions
in corporate finance, it may be used as an integrating exercise for many of the prior chapters.
Complexity: The case is somewhat complex. It is likely to require 2 hours.
Solutions
1. a. According to Figure 1, there are 113,640,000 shares of National Brands outstanding. But, A-1
b. The amount of liquid assets (i.e., cash and equivalents) on hand at National is $1,153,000,000. If
c. After the purchase, A-1’s total debt will consist of:
A-1’s old debt: $1,899,500,000
Since all the funds to make the purchase were borrowed, A-1’s total equity remains $395,000,000
This is astonishing. Such high debt to equity ratios are not normally encountered except in
financial institutions, such as banks. (In fact, A-1’s balance sheet resembles that of a bank—over
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
d. In b, above, we computed that $4,784,690,000 was needed to make the purchase. If A-1 issues
e. The total number of shares outstanding at A-1 after the purchase will be the 61,800,000 old shares
plus 368,053,077 newly issued ones. Total expected earnings are the $152,000,000 A-1 originally
f. $1.28 represents a 48% decline from A-1’s previous expected EPS of $2.46 (the decline, of
course, was caused by the fact that National’s P/E is much higher than A-1’s). A-1’s stockholders
will not be pleased, unless Mr. O’Brien can convince them that they will be better off in the long
2. a. Employing the Pac Man defense will cost National $17 a share times the 61,800,000 shares of
b. A-1 has $1,736,800 of liquid assets available. Using this amount to offset the amount of National
It’s a rather surprising result that National could buy A-1 without spending any of its own money
c. National’s total debt after the purchase will be its old debt plus A-1’s debt:
National’s total equity after the purchase will simply be its old equity, $3,050,000,000.
The new ratio of 1.31 to 1 is nearly double National’s old ratio of .69 to 1, so the company will
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
d. If National uses A-1’s $1,736,800,000 cash and equivalents balance to pay down A-1’s
$1,899,500,000 debt balance, it will not have any left to apply to the stock issue. Therefore
e. The total number of shares outstanding at National after the purchase will be the 113,640,000 old
shares plus 21,942,356 newly issued ones. Total expected earnings are the $400,000,000
f. Yes, Mr. Hall is correct. The purchase of A-1 will not dilute National’s earnings, at least in the
3. If National’s P/E remains at its previous value of 13.6, its stock price can be expected to rise to $4.07
x 13.6 = $55.35. Of course, it is highly unlikely that its P/E will remain at its previous value. A-1’s
Note—students may question why A-1 has a higher growth rate than National, yet its P/E is much
4. a. As a result of A-1’s offer to buy National, National’s stockholders stand to realize a 15% capital
gain, but National’s management is against the move and will try to convince the stockholders to
reject it. On the other hand, A-1’s stockholders stand to realize a 31% capital gain ($4 to $13) if
b. It is difficult to say whether or not National’s stockholders are better off as a result of their
company’s employment of the Pac Man defense. On the one hand they have been denied the
c. Those who take sides with the corporate “raiders” would say that they provide a valuable function
in the economy—weeding out inefficiency. They do this by buying inefficiently managed
companies and restructuring them into more effective units. In the long run, they say, the
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
