Question

Birdie Golf, Inc., has been in merger talks with Hybird Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $550 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and both believe that a merger will result in synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses. — Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger negotiations. Bryce has prepared the following pro forma financial statements for Hybrid Golf assuming the merger takes place. The financial statements include all synergistic benefits from the merger. Year 1 2 3 4 5 • If Birdie Golf buys Hybrid Golf, an immediate dividend of $150 million would be paid from Hybrid Golf to Birdie. Stock in Birdie Golf currently sells for $94 per share, and the company has 18 million shares of stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both companies can borrow at an 8 percent interest rate. Bryce believes the current cost of capital for Birdie Golf is 11 percent. The cost of capital for Hybrid Golf is 12.4 percent, and the cost of equity is 16.9 percent. In five years, the value of Hybrid Golf is expected to be $600 million. Suppose Hybrid agrees to a merger price of $68.75/share. To find the NPV of the acquisition for Birdie, incremental cash flows for each year have to be decided for every period: year 0, year 1, …5. What would be Birdie’s incremental cash flow in year 0? --$400,000,000 --$550,000,000 $150,000,000 $550,000,000.

Answer 1

Incremental cash flow in year 0:

Amount to be paid in cash = -$550,000,000

Amount received as dividend = $150,000,000

Incremental Cash Flow in Year 0 = -$400,000,000