FIN 595/595G Advanced Corporate Finance

Case Assignment: Made for each other

A. Briefly, summarize the key facts of the case, identify the problem/decision, and explain why it is important. B. Based on the data and information provided in the case, please respond to the following questions:

1. Using the formula for free cash flow, explain the various reasons why firms undertake mergers and acquisitions. Which of these reasons are most likely to apply to the acquisition that Metallic Creations Inc. is considering?

2. Comment on the directors suggestion of playing the relative P/E game. For your calculations, assume that New Horizons shareholders have agreed to an exchange ratio of one share of Metallic Creations Inc. for every two shares held in New Horizon. Also, assume just for the purpose of this particular question that there is no synergy between the two firms. Therefore, the combined net income of the two firms will just be the sum of their net incomes prior to the completion of the deal.

3. Using the free cash flow method of valuation, calculate the maximum offer price that Metallic Creations Inc. would be justified in making for New Horizon Products. Note: For this question and all subsequent questions, take into account any synergy between the two firms.

4. Lets say that Metallic Creations Inc. is able to close the deal at a price of $1000 million by paying cash or by exchanging one of its shares for two shares of New Horizon. Should Metallic Creations use cash or stock as the payment mechanism? Why? What are the pros and cons of each payment mechanism for the acquiring and the target firm respectively?

5. If New Horizon Products wants to block the takeover attempt what can it do? Explain the rationale and possible outcome of each suggestion.

6. What are some tax issues that must be considered by Metallic Creations Inc. management team when making the bid?

7. One M&A committee member told Jassir that the main advantage of this deal to Metallic Creations Inc. is the diversification benefit that exists from the two companies being in totally different industry sectors, and that Jassir should really stress that point in his presentation. Do you agree? Explain.

C. What would you recommend to the Board of Metallic Creations? Should they go ahead with this acquisition? Justify your recommendation by highlighting the key results of your analysis. Also, include any limitations of the analysis.