6. Mergers and Acquisitions (30 points) a. In merger and acquisition deals, the empirical evidence shows that acquirers pay a premium over the current market price to acquire the shares of the target firms. On average the premium is 30%. Why would acquirers pay such high premiums? Name and DISCUSS two reasons in details. (10 points) b. To compare organic growth versus acquisition, please fill in the blanks marked X1 X11 in Table 5 below. In the acquisition, the market value of the target asset (X8) is $200 million higher than the intrinsic or DCF value (X3). Show detailed steps that lead to each X's. Assume a constant growth model for all cases. For X5 and X11, round the percentages to 2 decimal places, e.g., 1.23%. (20 points) Table 5. Organic Growth versus Acquisition: Fill in the Blanks! $ Millon, Percent Acquired growth Increase Growth of the Target Asset by 18% Organic growth Acquirer 25,000 2% 3,000 Revenues Expected growth NOPLAT Invested capital ROIC DCF value Market value Premium (30%) Value creation Value creation/ acquirer value 8,000 20% X1 2,000 12% 250 900 35% X3 (900) 2,000 X6 250 900 35% X7 (X8) (X9) X10 X11 X2 X4 X5 WACC is assumed to be 10% for the Acquirer and 15% for the organic growth/acquired asset. 6. Mergers and Acquisitions (30 points) a. In merger and acquisition deals, the empirical evidence shows that acquirers pay a premium over the current market price to acquire the shares of the target firms. On average the premium is 30%. Why would acquirers pay such high premiums? Name and DISCUSS two reasons in details. (10 points) b. To compare organic growth versus acquisition, please fill in the blanks marked X1 X11 in Table 5 below. In the acquisition, the market value of the target asset (X8) is $200 million higher than the intrinsic or DCF value (X3). Show detailed steps that lead to each X's. Assume a constant growth model for all cases. For X5 and X11, round the percentages to 2 decimal places, e.g., 1.23%. (20 points) Table 5. Organic Growth versus Acquisition: Fill in the Blanks! $ Millon, Percent Acquired growth Increase Growth of the Target Asset by 18% Organic growth Acquirer 25,000 2% 3,000 Revenues Expected growth NOPLAT Invested capital ROIC DCF value Market value Premium (30%) Value creation Value creation/ acquirer value 8,000 20% X1 2,000 12% 250 900 35% X3 (900) 2,000 X6 250 900 35% X7 (X8) (X9) X10 X11 X2 X4 X5 WACC is assumed to be 10% for the Acquirer and 15% for the organic growth/acquired asset