27 EPS, PE and Mergers The shareholders of Flannery SA have voted in favour of a buyout offer from Stultz plc. Information about each firm is given here:

Flannery Stultz Price–earnings ratio 5.25 21 Shares outstanding 60,000 180,000 Earnings £300,000 £675,000 Flannery’s shareholders will receive one share of Stultz equity for every three shares they hold in Flannery.

(a) What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV of the acquisition is zero?

(b) What must Stultz feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover.