Suppose that 3M has just made an offer to acquire IBM. Prior to the offer, IBM had 20 million shares outstanding that traded at a price of $35, and 3M had 80 million shares outstanding that traded at $30. Assume that prior to the offer the stock market did not anticipate an acquisition of IBM by 3M. 3Ms projections for how synergies would affect the combined firms expected FCFs over the next 5 years are those given below. You should assume that these additional expected FCFs will continue to grow at 2% a year after 2015, that FCFs are incurred at the end of each year, and that date 0 is the beginning of 2011. The appropriate r_U for the incremental cash flows from these synergies is 14%. The proposed merger will not affect the riskiness of either companys existing debt.

Change in FCF	2011	2012	2013	2014	2015
From Synergies ($m)	45	48	53	58	62

For Questions 1 and 2, suppose that prior to the announcement equity market prices of IBM and 3M actually reflected market participants expectations that a takeover would occur immediately and with certainty (100% probability). Market participants expected that the terms of a takeover deal would imply that 3Ms shareholders would gain 30% of the value of synergies, and that IBMs shareholders would gain the remaining 70% of the value of synergies.

1. Given this, what will now be the total equity value of the merged firm?

2. What is the gain or loss that IBM shareholders made due to the acquisition (expressed in dollars per IBM share)?