Suppose we want to figure out who gains and loses from the US Airways & AA merger Let's suppose the market information for these firms prior to deal being leaked was US Airways (A) PV = $3 billion #shares 150 m. share price=$20 - American (B) PV =$2 billion #shares = 400 m. share price=$5 US Airways & AA- Example [Part 2] Furthermore, suppose US Airways estimates that the merger will O Generate additional $5 m./year in FCF from AA's operations because of efficiency gains It will generate additional $10 m. per year in FCF from economies of scale Assume US Airways r = 10% A Assume AA's r = 11% A US Airways & AA- Example [Part 3] If US Airways offers to pay a $1 premium per share to the AA shareholders... How much value is created? What will be value of the combined firm [ignoring how the deal is paid for]? How much value goes to AA? How much value goes to US Airways?