14 May WHAT PORTION OF THE STOCK WILL THE OLD PATRICK SHAREHOLDERS HOLD IN THE FIRM AFTER THE ACQUISITION?
Advanced Corporate Finance
Spring 2016
Homework #14
Valuation Issues in Mergers & Acquisitions
1. You work in the finance department of a large corporation, which is considering the
acquisition of a smaller target firm. You have been assigned to make the preliminary analysis of
the value of the target. In the most recent fiscal year the target firm generated total cash flows of
$24,785,000.
You will first use a Gordon Growth Model to estimate a range of Stand Alone Values for the
target. You feel that reasonable discount rates for its future cash flows are between 13% and
16%, and that probably (perpetual) annual growth rates for the flows are between 3% and 5%.
The managers of your firm feel that the merger of the two entities will create perpetual annual
synergies of between $5,500,000 and $7,500,000.
Use these parameters to estimate the potential high and low values of the target firm.
2. Patrick Inc. is considering an acquisition of Acme Corp. Patrick has 3,859,250 shares
outstanding selling for $34.17. Acme has 1,994,500 shares outstanding selling for $21.67.
What are the market values of both firms? In a stock-for-stock offer how many shares of Patrick
stock will each Acme equity holder receive for his share (if they allocate purely on the basis of
the current prices)? If there are no synergies, how many shares will be outstanding after the
acquisition? What will be the value of each share? What portion of the stock will the old Patrick
shareholders hold in the firm after the acquisition?
Patrick has adequate excess-cash-on-hand to pay each shareholder of Acme $7.50. If they wish
to make an acquisition based on a combination of stock and cash, how many shares of Patrick
stock will each Acme stock holder have to be given to buy-out the remainder of his share beyond
the $7.50? If there are no synergies, how many shares will be outstanding after the acquisition?
What will be the value of each share (recall that each shareholder of the Acme stock is being
given $7.50, so the value of the firm will decline accordingly)? What portion of the stock will the
old Patrick shareholders hold in the firm after the acquisition?
Now, presume that the merger will create synergies that have a present value of $30,000,000.
Assume the two firms execute a straight stock-for-stock offer at the exchange ratio in the first
example above. What will be the firm value, the number of outstanding shares, and the share
price after the acquisition?
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