CASE 3 (25 points)

Nike Corporation is analysing the possible acquisition of Adidas Corporation. There are two alternatives for Nike: 1) to use cash or 2) stock as payment. Both firms have no debt. Nike believes the acquisition will increase its total after-tax annual cash flow by 1.3 million indefinitely. The current market value of Adidas is 27 million, and that of Nike is 62 million. The appropriate discount rate for the incremental cash flows is 11%. Nike is trying to decide whether it should offer 35% of its stock or 37 million in cash to Adidass shareholders.

Instructions:

a. What is the cost of each alternative? (5 points)

b. What is the NPV of each alternative? (5 points)

c. Which alternative should Nike choose and why? (5 points)

d. What are some important factors in deciding whether to use stock or cash in an acquisition? (5 points)

e. Explain what defensive tactics the managers of Adidas Corporation could use to resist acquisition. (5 points)