Case 3: Mergers & Acquisitions

Genie Inc. is a manufacturer of kitchen appliances. After having been in business for 56 years, the firm is currently experiencing stable growth of 2 to 3% per year. Many industry experts consider Genie Inc. as a mature company. Genies current share price is $20, with 2,500,000 shares outstanding; weighted cost of capital (WACC) is 15%. The companys most recent financial statements are shown below:

Statement of Comprehensive Income (in $000)
Sales		$10,000
Cost of goods sold		7,000
Operating expenses		1,000
EBDIT		2,000
Depreciation		200
EBIT		1,800
Interest expense		1,342
Taxable income		458
Taxes (40%)		183
Net income		$ 275
Statement of Financial Position (in $000)
Cash	$ 8000	Accounts payable	$ 1,000
Inventory	583	Notes payable	3,417
Accounts receivable	833
Current assets	9,417	Current liabilities	4,417
		Long-term debt	10,000
Net fixed assets	20,000	Equity	15,000
Total assets	$29,417	Total liabilities & equity	$29,417

Genie has accumulated cash reserves of $8 million, and its CEO, Mr. Lionel Rich, believes that it is a good time to think about boosting Genies sales growth by acquiring another company that is younger, with better growth opportunities. Mr. Rich has narrowed down the choice to one potential target: Aladdin Corporation.

Aladdin is a relatively young company; it has only been in business for five years. Its main products are a line of extremely popular espresso machines. Its shares are selling at $7.50 per share. It has 1,000,000 shares outstanding, and a WACC of 18%. Aladdins financial statements are shown below:

Statement of Comprehensive Income (in $000)
Sales	$2,000
Cost of goods sold	1,300
Operating expenses	160
EBDIT	540
Depreciation	40
EBIT	500
Interest expense	297
Taxable income	203
Taxes	81
Net income	$ 122

Most Recent Statement of Financial Position ($000)
Cash	$ 200	Accounts payable	$ 500
Inventory	108	Notes payable	475
Accounts receivable	167
Current assets	475	Current liabilities	975
		Long-term debt	2000
Net fixed assets	7,500	Equity	5,000
Total assets	$7,975	Total liabilities & equity	$7,975

Mr. Rich estimates that the synergistic benefits from this acquisition will be $300,000 per year for the foreseeable future. His analysis also indicates that Genie can acquire Aladdin by paying $7.75 million in cash, or by swapping one Genie share for three Aladdin shares. Before Mr. Rich can take his recommendation to Genies Board of Directors, he needs answers to the following questions:

1. If Genie went ahead with the acquisition of Aladdin, what is the total value of the acquisition?
2. What is the maximum price per share that Genie should be willing to pay for this acquisition?
3. If Genie decided to go ahead with the cash acquisition, what will be its price per share after the acquisition?
4. What are the factors that determine whether the company should use cash acquisition or stock acquisition?
5. Discuss five different defensive tactics that the target company can use to thwart this takeover attempt.
6. What are the possible cash flow benefits from this acquisition?
7. Should the company consider diversification as a benefit of this acquisition?
8. Should Genie go ahead with the acquisition using cash or stock acquisition?