Question
In April 1994, Novell Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information on
In April 1994, Novell Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information on the two companies was as follows:
| Novell | WordPerfect | |
| Revenues | $1,200.00 | $600.00 |
| Cost of Goods Sold (w/o Depreciation) | 57.00% | 75.00% |
| Depreciation | $42.00 | $25.00 |
| Tax Rate | 35.00% | 35.00% |
| Capital Spending | $75.00 | $40.00 |
| Working Capital (as % of Revenue) | 40.00% | 30.00% |
| Beta | 1.45 | 1.25 |
| Expected Growth Rate in Revenues/EBIT | 25.00% | 15.00% |
| Expected Period of High Growth | 10 years | 10 years |
| Growth rate After High-Growth Period | 6.00% | 6.00% |
| Beta After High-Growth period | 1.10 | 1.10 |
Capital spending will be offset by depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%.
A. Estimate the value of Novell, operating independently.
B. Estimate the value of WordPerfect, operating independently.
C. Estimate the value of the combined firm, with no synergy.
D. As a result of the merger, the combined firm is expected to grow 24% a year for the high-growth period. Estimate the value of the combined firm with the higher growth.
E. What is the synergy worth? What is the maximum price that Novell can pay for Wordperfect?
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Personal Finance
Authors: Jack R Kapoor, Glencoe McGraw Hill, Les R Dlabay, Robert J Hughes
1st Edition
0078698006, 9780078698002
