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. Genie's current share price is $20, with 2,500,000 shares outstanding; weighted cost of capital (WACC) is 15%. The company's 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 Genie's 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%. Aladdin's 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 Genie's 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? (10 marks)

2. What is the maximum price per share that Genie should be willing to pay for this acquisition? (5 marks)

3. If Genie decided to go ahead with the cash acquisition, what will be its price per share after the acquisition? (15 marks)

4. What are the factors that determine whether the company should use cash acquisition or stock acquisition? (10 marks)

5. Discuss five different defensive tactics that the target company can use to thwart this takeover attempt. (15 marks)

6. What are the possible cash flow benefits from this acquisition? (12 marks)

7. Should the company consider diversification as a benefit of this acquisition?

(5 marks)

8. Should Genie go ahead with the acquisition using cash or stock acquisition?

(28 marks)