On July 15, 2013, Loblaw announced that it would buy Shoppers Drug Mart. Loblaw stated its motivations as fighting against intensifying competition. The merger could make an estimated synergistic gain of $300 million annually for the indefinite future.

Loblaw

Share Price:$47.58

Number of Shares Outstanding:282 million

Net Income:$659.88 million

Shoppers Drug Mart

Share Price:$48.70

Number of Shares Outstanding:200 million

Net Income: $600 million

Given the above information, answer the following questions:

1) What type of merger is this purchase? Name two possible sources of synergistic gain in this merger. Calculate the present value of the merger gain using an appropriate cost of capital of 9%.

2) If Shoppers Drug Mart is willing to be acquired for $61.54 per share in cash, what is the NPV of the merger? Calculate the merger premium for Shoppers shareholders both in percentage term and in dollar term. What will the price per share of the merged firm be after the merger is completed?

3) Suppose Shoppers Drug Mart is agreeable to a merger by an exchange of stock. If Loblaw offers 1.2934 shares of its own stock for every of Shoppers' share, what will the price per share of the merged firm be? What is the NPV of the merger?

4) After the merger announcement, the share prices of both Loblaw and Shoppers have risen, by 7.6% and 26%, respectively. How is this positive market reaction different from the existing empirical evidence on mergers and acquisitions? Briefly explain.

5) The purchase of Shoppers by Loblaw is friendly. If this were a hostile takeover, name three defensive tactics available to Shoppers.