Question

You are leading a team on a M&A deal. Suddenly your analyst has disappeared and you have the following unfinished spreadsheet. The acquirer and the target are assumed to have zero growth. Now it is up to you to finish this job. Acquirer Target Combined Sales 400 100 500 Operating Expenses 200 60 260 Annual cost 20 savings EBIT 200 40 ?1? 120 ??? EBIT[1 t) 24 Depreciation 40 30 ??? Gross Plant & 30 30 ??? Equipment Change in Working Capital 10 5 ??? Free Cash Flow 120 19 ?2? to Firm 9 Discount rate 8.00% Firm Value 211.111 1500 ?3? Long term debt 400 50 450 1100 Equity value 161.111 ?4? un

14. What is the synergy of this merger?

15. Suppose you decide to share 30% of the synergy to the target shareholders, what is your initial offer?

16. What is the maximum price you can offer?

Answer 1

Answer 14:

First we complete the table as follows:

500 Acquirer Target combined 400 100 200 260 20 200 260 120 156 40 70 Sales Operating Expenses Annual cost savings EBIT EBIT (1-T) Depreciation Gross Plant & Equipment Change in working capital Free Cash Flow to Firm Discount rate Firm value Long term debt Equity Value 15 10 12019 8% 1500 211.111 400 50 1100 161.111 151 8% 1887.50 450 1437.50

Hence:

The synergy from this merger = 1437.50 - 1100 - 161.111 = $176.389

The synergy from this merger = $176.389

Answer 15:

If you decide to share 30% of the synergy to the target shareholders, initial offer = 161.111 + 30% * 176.389 = 214.03

If you decide to share 30% of the synergy to the target shareholders, initial offer = 214.03

Answer 16:

Maximum price you can offer = 161.111 + 176.389 = 337.50

Maximum price you can offer = 337.50