Birdie Golf has been in merger talks with Hybrid Golf Company for the past 6 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 the companies
believe a merger will result in significant 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:

Bryce is also aware that the Hybrid Golf division will require investments
each year for continuing operations, along with sources of financing. The
following table outlines the required investments and sources of financing:

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not
optimal. If the merger takes place, Hybrid Golf will immediately increase its leverage with a
€110 million debt issue, which would be followed by a €150 million dividend payment to
Birdie Golf. This will increase Hybrid’s debt-to-equity ratio from 0.50 to 1.00. Birdie Golf
will also be able to use a €25 million tax loss carry-forward in 2011 and 2012 from Hybrid Golf’s previous operations. The total value of Hybrid Golf is expected to be €900 million in 5
years, and the company will have €300 million in debt at that time.
Equity in Birdie Golf currently sells for €94 per share, and the company has 18 million
shares of equity outstanding. Hybrid Golf has 8 million shares of equity outstanding. Both
companies can borrow at an 8 per cent interest rate. The risk-free rate is 6 per cent, and the
expected return on the market is 13 per cent. Bryce believes the current cost of capital for
Birdie Golf is 11 per cent. The beta for Hybrid Golf equity at its current capital structure is
1.30.
Bryce has asked you to analyse the financial aspects of the potential merger. Specifically,
he has asked you to answer the following questions:
1 Suppose Hybrid shareholders will agree to a merger price of €68.75 per share. Should
Birdie proceed with the merger?
2 What is the highest price per share that Birdie should be willing to pay for Hybrid?
3 Suppose Birdie is unwilling to pay cash for the merger but will consider an equity
exchange. What exchange ratio would make the merger terms equivalent to the original
merger price of €68.75 per share?
4 What is the highest exchange ratio Birdie would be willing to pay and still undertake the
merger?

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Sales Productions costs Depreciation Other expenses EBIT Interest 2011 () 2010 () 800,000,000 900,000,000 562,000,000 630,000,000 75,000,000 80,000,000 80,000,000 90,000,000 83,000,000 100,000,000 19,000,000 22,000,000 2012 () 1,000,000,000 700,000,000 82,000,000 100,000,000 2013 () 1,125,000,000 790,000,000 83,000,000 113,000,000 118,000,000 139,000,000 24,000,000 25,000,000 2014 () 1,250,000,000 875,000,000 83,000,000 125,000,000 167,000,000 27,000,000