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
Solutions
1. a. According to Figure 1, there are 113,640,000 shares of National Brands outstanding. But, A-1
A-1 can use this amount to offset the amount of borrowing required, the total amount it will have
A-1’s old debt:
$1,899,500,000
National’s debt:
$2,110,300,000
Amount borrowed:
$4,784,690,000
Total:
$8,794,490,000
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
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
2. a. Employing the Pac Man defense will cost National $17 a share times the 61,800,000 shares of A-
b. A-1 has $1,736,800 of liquid assets available. Using this amount to offset the amount of National
stock to be issued brings the total amount of cash needed to be raised down to:
c. National’s total debt after the purchase will be its old debt plus A–1’s debt:
National’s old debt:
$2,110,300,000
A-1’s old debt:
$1,899,500,000
National’s new debt:
$4,009,800,000
National’s total equity after the purchase will simply be its old equity, $3,050,000,000.
Therefore, National’s debt to equity ratio after the purchase will be:
$4,009,800,000 / $3,050,000,000 = 1.31 to 1
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
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
old P/E was only 5.3, less than half that of National. It is likely, therefore, that investors will lower
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
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