Question

1) Before the offer for Gillette was announced (i.e., at the close of trade on 1/26/2005), P&G’s stock price was $55.44, and the firm had 2,522.583 million shares outstanding (fully diluted). If the proposed merger produced ZERO synergy, what would happen to P&G’s stock price after the merger is completed?

Given: Gillette’s stock price at the close of trade on 1/26/2005 was $45, with 1,068.379 million shares outstanding and had an implied offer for its stock price at $54.05

Given the price of the Gillette acquisition is $57.177 billion, its share price at the close of trade 1/26/2005 is $45 and the firm has 1,068.379 million shares outstanding the exchange ratio offer for Gillette is 0.975.

2. In the scenario just described above, what would the premium have been for Gillette’s shareholders selling their firm to P&G?

3. Right after the deal was announced P&G’s stock price dropped about 4% to $53.23. Based on this market price for the acquirer’s stock, how much synergy was the market expecting this acquisition to produce (in dollar terms)? And in this scenario, what would the premium have been for Gillette’s shareholders selling their firm to P&G?

Answer 1

1. Market Value of P&G before merger = $55.44/share * 2522.583 million shares

=$139852.002 million

Market Value of Gillette before merger = $45/share * 1068.379 million shares

=$48077.055 million

With no synergies, value of merged firm = $139852.002 million +$48077.055 million = $187929.0565 million

Amount paid to Gillette Shareholders = $54.05/share * 1068.379 million shares =$57745.885 million

So, value left for P&G shareholders = $187929.0565 million - $57745.885 million = $130183.172 million

Share Price of P&G after merger = $130183.172 million / 2522.583 million shares = $51.61 per share

So, share price of P&G will fall to $51.61 per share after merger

2. Premium for Gillette Shareholders = $57.177 billion - $48.077 billion

= $9.099945 billion

(As per calculations , value paid to Gillette is $57.746 billion , so premium will be $9.669 billion. However, the given value of acquisition is taken)

3. Synergy expected by market = ($53.23 -$51.61)* 2522.583 million = $4093.92 million

Premium for Gillette shareholders = $9.099945 billion - $4.09392 billion = $5.006 billion