Firm A is going to take over Firm B. The deal is all in stock. Firm B shareholders will receive 1.76 shares of the combined firm for each share that they own. Firm A shareholders will retain 1 share of the combined firm for each share that they own. Before the announcement of the merger (and any rumors of it became public), Firm A shares were trading at $18.3 per share and Firm B shares were trading at $27.6. Firm A has 147 million shares outstanding and Firm B has 65 million shares outstanding. Assume that the present value of the synergies created from the deal is $1.2 billion and that this reflects all the costs and benefits associated with this deal for the shareholders.

a. What are the gains for Firm A shareholders from this merger?

What are the gains for Firm B shareholders?

b. What (quantitatively) would you have expected to be the share prices of Firm A and Firm B to the announcement of the acquisition if your calculations in (a) are accurate?

What rate of return to shareholders of Firm A and Firm B on the announcement day does this imply?

On the announcement day the share price of Firm A fell and that of Firm B rose. Give the most likely reason why this happened.