Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin three years from now, and grow at 3% a year. In addition the analyst is assuming an after-tax integration cost of 0.25 billion, and taxes of 21%. Assume that the integration cost of 0.25 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 9% to value the synergies. Company B’s equity is trading at 4.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B. a) Compute the value of the synergy as estimated by the analyst. Please show your calculations. b) Does the estimate of synergies in a) justify the premium that company A offered to company B?

Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin three years from now, and grow at 3% a year. In addition the analyst is assuming an after-tax integration cost of 0.25 billion, and taxes of 21%. Assume that the integration cost of 0.25 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 9% to value the synergies. Company B’s equity is trading at 4.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B. a) Compute the value of the synergy as estimated by the analyst. Please show your calculations. b) Does the estimate of synergies in a) justify the premium that company A offered to company B?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter23: Corporate Restructuring

Section: Chapter Questions

Problem 10P

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Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now and grow at 2.5% a year. Also, the analyst is assuming an after-tax integration cost of 0.75 billion and taxes of 20%. Assume that the integration cost of 0.75 billion happens when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies. Company B's equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B. Compute the value of the synergy (In $ Million) as estimated by the analyst. (Please show your calculations in Detail). Does the estimate of synergies in A, justify the premium that company A offered to company B? (Please briefly explain the rationale in Detail).
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