CASE 3

Firm Alpha is analysing the possible acquisition of Firm Beta. There are two alternatives for Firm Alpha: to use cash or stock as payment. Both firms have no debt. You have the following premerger information (all figures are in millions): Firm Alpha Firm Beta Price per share 40 20 Number of shares 50 20 Total market value 2,000 400 You estimate that the incremental value of the acquisition is 200. The board of Firm Beta has indicated that it will agree to a sale if the price is 300, payable in cash or stock.

Instructions:

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Firm Alpha choose?

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

e. Explain what defensive tactics the managers of Firm Beta could use to resist acquisition.