Banking Chapter 28 Homework Mergers And Acquisitions What Are The Two Primary Mechanisms Under Which

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Chapter 28

Mergers and Acquisitions

28–1. What are the two primary mechanisms under which ownership and control of a public

corporation can change?

28–2. Why do you think mergers cluster in time, causing merger waves?

28–3. What are some reasons why a horizontal merger might create value for shareholders?

28–4. Why do you think shareholders from target companies enjoy an average gain when acquired,

while acquiring shareholders on average often do not gain anything?

28–5. If you are planning an acquisition that is motivated by trying to acquire expertise, you are

basically seeking to gain intellectual capital. What concerns would you have in structuring the

deal and the post-merger integration that would be different from the concerns you would have

when buying physical capital?

356 Berk/DeMarzo, Corporate Finance, Fourth Edition, Global Edition

c. In part (a), the change in the EPS simply came from combining the two companies, one of which

was earning $4 per share and the other was earning $1 per share. Although your shareholders end

up with lower EPS after the transaction, they have paid a fair price (market price), exchanging

their $4 per share before the transaction for either lower, but safer, EPS after the transaction, or

lower EPS that are expected to grow more in the future. Either way, focusing on EPS alone cannot

tell you whether shareholders are better or worse off.

d. If you simply combine the two companies without any indicated synergies, then the total value of

the company will be $(56)(1.6) million + $(24)(1.3) million = $120.8 million. You will have

earnings totaling $7.7 million, so your P/E ratio is $120.8/$7.7 = 15.69. Your P/E ratio before the

merger was $89.6/$6.4 = 14, and TargetCo’s was $31.2/$1.3 = 24. You can see that by buying

TargetCo for its market price and creating no synergies, the transaction simply ends up with a

company whose P/E ratio is between the P/E ratios of the two companies going into the

transaction. Again, simply focusing on metrics like P/E does not tell you whether you are better or

worse off. (Your P/E went up from 14 to 15.69, but your shareholders are no better or worse off.)

28-10. If companies in the same industry as TargetCo (from Problem 9) are trading at multiples of 14

times earnings, what would be one estimate of an appropriate premium for TargetCo?

28-11. You are invested in GreenFrame, Inc. The CEO owns 4% of GreenFrame and is considering an

acquisition. If the acquisition destroys $57 million of GreenFrame’s value, but the present value

of the CEO’s compensation increases by $5 million, will he be better or worse off?

28-12. Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will

pay a 22% premium over Thor’s premerger price. If Thor’s premerger price per share was $42

and Loki’s was $53, what exchange ratio will Loki need to offer?

28-13. The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $48

per share and LE is trading for $74 per share, implying a premerger value of LE of

approximately $4.5 billion. If the projected synergies are $1.48 billion, what is the maximum

exchange ratio NFF could offer in a stock swap and still generate a positive NPV?

28-14. Let’s reconsider part (b) of Problem 9. The actual premium that your company will pay for

TargetCo will not be 20%, because on the announcement the target price will go up and your

price will go down to reflect the fact that you are willing to pay a premium for TargetCo.

Assume that the takeover will occur with certainty and all market participants know this on the

announcement of the takeover.

a. What is the price per share of the combined corporation immediately after the merger is

completed?

Chapter 28/Mergers and Acquisitions 357

b. What is the price of your company immediately after the announcement?

c. What is the price of TargetCo immediately after the announcement?

d. What is the actual premium your company will pay?

28-15. ABC has 1 million shares outstanding, each of which has a price of $25. It has made a takeover

offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.59.

Assume that the takeover will occur with certainty and all market participants know this.

Furthermore, there are no synergies to merging the two firms.

a. Assume ABC made a cash offer to purchase XYZ for $4 million. What happens to the price

of ABC and XYZ on the announcement? What premium over the current market price does

this offer represent??

b. Assume ABC makes a stock offer with an exchange ratio of 0.16. What happens to the price

of ABC and XYZ this time? What premium over the current market price does this offer

represent?

c. At current market prices, both offers are offers to purchase XYZ for $4 million. Does that

mean that your answers to parts (a) and (b) must be identical? Explain.

$3.81m, implying a price of $3.81 per share.

28-16. BAD Company’s stock price is $30, and it has 2 million shares outstanding. You believe you can

increase the company’s value if you buy it and replace the management. Assume that BAD has a

poison pill with a 15% trigger. If it is triggered, all BAD’s shareholders—other than the

acquirer—will be able to buy one new share in BAD for each share they own at an 80% discount.

Assume that the price remains at $30 while you are acquiring your shares. If BAD’s

management decides to resist your buyout attempt and you cross the 15% threshold of

ownership:

a. How many new shares will be issued and at what price?

b. What will happen to your percentage ownership of BAD?

c. What will happen to the price of your shares of BAD?

358 Berk/DeMarzo, Corporate Finance, Fourth Edition, Global Edition

d. Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who

benefits)? If you gain, from where does the gain come (who loses)?

28-17. How does a toehold help overcome the free rider problem?

28-18. You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater

Company. UnderWater’s stock price is $24, and it has 2.25 million shares outstanding. You

believe that if you buy the company and replace its management, its value will increase by 42%.

You are planning on doing a leveraged buyout of UnderWater, and will offer $30 per share for

control of the company.

a. Assuming you get 50% control, what will happen to the price of non-tendered shares?

b. Given the answer in part (a), will shareholders tender their shares, not tender their shares,

or be indifferent?

c. What will your gain from the transaction be?