Modern Auto (MA), an automobile parts supplier, has made an offer to acquire Sky Systems (SS), creator of software for the airline industry, The offer is to pay Sky System's shareholders the current market value of their stock in Modern Auto's stock. The relevant information it used in those calculations is given below:

	Modern Auto	Sky Systems
Share Price	$40	$25
Shares Outstanding (in millions)	40	15
Earnings (millions)	$100	$30

Although the total earning of the combined company will not increase and are estimated to be $130 million, the Modern Auto treasurer argues that there are two attractive reasons to merge. First, the merger of MA and SS will result in lower risk for our shareholders because of the diversification effect. Second, the EPS increases, our stock price will increase in line with the EPS increase because our P/E will stay the same.

SS managers are not interested in the MA offer. The managers, instead approach HiFly Inc which is the same industry as SS, to see if it would be interested in acquiring SS. HiFly is interested and both companies believe there will be synergies from this acquisition. If HiFly were to acquire SS, it would do so by paying $400 million in cash.

HifLy is somewhat concerned whether antitrust regulators would consider the acquistion of sky systmes an antitrust violation. The market in which the two companies operate consists of wight competitors. The largest company has a 25% market share. Hifly has the second largest market share of 20%. Five companies, including Sky Systems, each have a market share of 10%. The smallest company has a 5% market share.

1. Are the treasurers two statements about his shareholders benefitting from the diversification effect of the merger and about the increase in the stock price correct?

	Merger will result in lower risk for shareholders	Stock Price will increase in line with the EPS Increase
A.	No	No
B.	No	Yes
C.	Yes	No
D.	Yes	Yes

2. Which of the following defenses best describes the role of HiFly in the acquisition scenario?

A. Crown jewel.

B. Pac-Man

C. White knight.

D. White squire.

3. If Sky Systems were to be acquired by Modern Auto under the terms of the original offer, the post-merger EPS of the new company would be ______________ (Please show all work)

4. Suppose HiFly acquires Sky Systems for the stated terms. The gain to Sky Systems shareholders resulting from the merger transaction would be ______________

5. If HiFly and Sky Systems attempt to merge, what would be the increase in the Herfindahl-Hirschman Index (HHI) and the probable action by the Department of Justice and the FTC, respectively, in response to the merger announcement?

	Increase in the HHI	Probable Response of Department of Justice and FTC
A.	290	To challenge the merger
B.	290	To investigate the merger
C.	400	To challenge ther merger
D.	400	To investigate the merger