Chapter 28, M&A 28.4
If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the actual premium Rearden will pay will be closest to: A) 14.7%. B) 18.0%. C) 20.0%. D) 22.4%.
. Answer: A Explanation: Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million. Therefore, Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal. This will give Rearden 10 million + 3.6 million = 13.6 million shares post-merger. The total value of Rearden premerger is $20 per share × 10 million shares = $200 million and the value of Associated premerger is $15 per share × 4 million shares = $60 million, for a combined value of $260 million. The Associated shareholders will own 3.6/13.6 percent of the company or $260 million × 3.6/13,6 = $68.82 million in value. So, Rearden is paying $68.82 million for a company worth $60 million. The premium is 68.2/60 - 1 = .147 or 14.7%
Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction. 1) If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the price per share of the combined corporation after the merger will be closest to: A) $19.12. B) $20.00. C) $26.00. D) $17.20.
: A Explanation: Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million. Therefore, Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal. This will give Rearden 10 million + 3.6 million = 13.6 million shares post-merger. The total value of Rearden premerger is $20 per share × 10 million shares = $200 million and the value of Associated premerger is $15 per share × 4 million shares = $60 million, for a combined value of $260 million. The share price after the merger is $260 million/13.6 million shares = $19.12.
KT corporation has announced plans to acquire MJ corporation. KT is trading for $45 per share and MJ is trading for $25 per share, with a premerger value for MJ of $3 billion . If the projected synergies from the merger are $750 million, what is the maximum exchange ratio that KT could offer in a stock swap and still generate a positive NPV?
: Exchange ratio < PT/PA (1+ (S/t)=45/25(1+ (750/3) = 2.25
If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the price per share of Associated Steel immediately after the announcement will be closest to: A) $15.00. B) $17.20. C) $18.60. D) $19.10
B Explanation: Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million. Therefore, Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal. This will give Rearden 10 million + 3.6 million = 13.6 million shares post-merger. The total value of Rearden premerger is $20 per share × 10 million shares = $200 million and the value of Associated premerger is $15 per share × 4 million shares = $60 million, for a combined value of $260 million. The Associated shareholders will own 3.6/13.6 percent of the company or $260 million × 3.6/13.6 = $68.82 million in value. The per share price can be calculated by dividing the $68.82 million in value by 4 million shares of Associated = $17.21 per share.
Taggart Transcontinental and Phoenix-Durango have entered into a stock swap merger agreement whereby Taggart will pay a 30% premium over Phoenix-Durango's premerger price. If Taggart's premerger price per share was $15 and Phoenix-Durango's was $30, then the exchange ratio that Taggart will offer is closest to: A) 0.4:1. B) 1.8:1. C) 2.0:1. D) 2.6:1.
D Explanation: Ratio = target price 1+ premium) / acquirer price = = 2.6 or 2.6:1
If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the price per share of the Rearden immediately after the announcement will be closest to: A) $15.00. B) $17.20. C) $18.60. D) $19.10
D Explanation: Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million. Therefore, Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal. This will give Rearden 10 million + 3.6 million = 13.6 million shares post-merger. The total value of Rearden premerger is $20 per share × 10 million shares = $200 million and the value of Associated premerger is $15 per share × 4 million shares = $60 million, for a combined value of $260 million. The share price after the merger is $260 million/13.6 million shares = $19.12 and this will be immediately felt in Rearden's stock price at the announcement
) A stock-swap merger is a positive-NPV investment for the acquiring shareholders if the share price of the merged firm (the acquirer's share price after the takeover) exceeds the premerger price of the acquiring firm
True
A potential profit arises from the difference between the target's stock price and the implied offer price, and is referred to as the merger-arbitrage spread.
True
Any goodwill created in a merger deal can be amortized for tax purposes over 15 years
True
How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm
True
If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price
True
In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.
True
It is not true arbitrage because there is a risk that the deal will not go through. If the takeover did not ultimately succeed, the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.
True
Many transactions are carried out as acquisitive reorganizations under the tax code. These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets.
True
Once the acquirer has completed the valuation process, it is in the position to make a tender offer— that is, a public announcement of its intention to purchase a large block of shares for a specified price.
True
Purchasing a corporation usually constitutes a very large capital investment decision, so it requires a more accurate estimate of value that includes careful analysis of both operational aspects of the firm and the ultimate cash flows the deal will generate.
True
The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value.
True
Traders known as risk-arbitrageurs, who believe that they can predict the outcome of a deal, take positions based on their beliefs
True
Consider the following equation:(x/NT) < ((T+S)/A) The term x in this equation refers to:
the number of new shares to pay for the target.
Consider the following equation:(x/NT) < ((T+S)/A) The term T in this equation refers to:
the premerger (standalone) value of the target.
Consider the following equation:(x/NT) < ((T+S)/A) The term A in this equation refers to:
the premerger, or standalone, value of the acquirer
Consider the following equation:(x/NT) < ((T+S)/A) The term S in this equation refers to:
the value of the synergies created by the merger.
Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders.
False: Any cash received in full or partial exchange for shares triggers an immediate tax liability for target shareholders
If we view the pre-bid market capitalization as the stand-alone value of the target, then from the bidder's perspective, the takeover is a positive-NPV project only if the synergies created do not exceed the premium it pays.
False: If we view the pre-bid market capitalization as the stand-alone value of the target, then from the bidder's perspective, the takeover is a positive-NPV project only if the premium it pays does not exceed the synergies created.
Once a tender offer is announced, the uncertainty about whether the takeover will succeed reduces the volatility of the stock price. This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility
False: Once a tender offer is announced, the uncertainty about whether the takeover will succeed adds volatility to the stock price. This uncertainty creates an opportunity for investors to speculate on the outcome of the deal
The method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting.
False: While the method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes, it does not affect the combined firm's financial statements for financial reporting
