Bright Eyes Inc. specializes in developing and manufacturing contact lenses. The companys executives believe that they can achieve more rapid growth by making acquisitions that create synergies via cost savings.

Fenner, Inc. Fenner develops, manufactures, and markets common types of contact lenses in the US and Canada. In a potential merger, all assets and liabilities of Fenner will be absorbed by Bright Eyes.

After extensive discussions with the management team, Townsend concludes that a merger offer for Fenner would be most beneficial to Bright Eyes due to its estimated $100 million cost savings synergies. Bright Eyes agrees to offer $380 million cash for Fenner.

Bright Eyes currently has 20 percent of the contact lenses market while Fenner has a 10 percent market share. Bright Eyes management, however, is quite concerned that a merger with Fenner may trigger anti-trust regulators to scrutinize the merger deal. There are eight other firms in the industry. The largest firm, Clear Eyes, has 30 percent of the market. Jefferson and Lesley each have 10 percent of the market. Five other smaller firms each have 4 percent of the market. Fenner has 20 million shares outstanding and the pre-merger stock price is $15 a share. The company has no debt. Townsend has projected that the post-merger free cash flows from Fenner, in millions of dollars, would be 12, 15, 20, and 24 at the end of the next four years, respectively. After year 4, he projects free cash flows to grow at a constant rate of 7 percent per year. The required rate of return for Bright Eyes and Fenner are 10 and 12 percent respectively.

9. If Bright Eyes and Fenner continue with their merger plans, the increase in Herfindahl-Hirschman (HHI) and the probable action by the FTC, respectively, in response to the merger announcements are: A.Increase in HHI: 900; Probable Response of FTC: challenge B.Increase in HHI: 400; Probable Response of FTC: challenge C.Increase in HHI: 400; Probable Response of FTC: possible challenge

12. Suppose Bright Eyes acquires Fenner for the stated terms. The gain to Fenners shareholders and Bright Eyes shareholders resulting from the merger would be closest to: A.Fenners Owners Gain: $180 million; Bright Eyes Owners Gain: $100 million B.Fenners Owners Gain: $80 million; Bright Eyes Owners Gain: $100 million C.Fenners Owners Gain: $80 million; Bright Eyes Owners Gain: $20 million