The firm Turf plans to acquire Fence, another firm in the same industry. Both firms are financed entirely by equity and have the same business risk. There are no taxes or other market imperfections The table below shows relevant financial information for the two firms Price per share, $ Number of shares Turf Fence 9.00 4.40 20.000.000 10,000,000 Turf is considering two possible acquisition methods: a share exchange, or a cash acquisition financed by borrowing. The acquisition will result in expected operating cost savings for the merged (post-acquisition) firm with a total present value of $45 million. Reorganisation costs for the merged business will have a present value of $10 million, regardless of the acquisition method. Suppose Turf offers new shares in itself in exchange for Fence's entire 10 million shares (a) What will be the value of the merged firm? What is the maximum number of shares that Turf should offer, such that its existing shareholders will not be worse off? (5 marks) (b) How many new shares should Turf issue to Fence's shareholders, to enable both firms individual shareholders to experience the same proportional increase in their wealth from the acquisition? What is the merged firm's share price? (7 marks) (c) What cash offer would give both firms individual shareholders the same proportional increase in their wealth? (4 marks) The firm Turf plans to acquire Fence, another firm in the same industry. Both firms are financed entirely by equity and have the same business risk. There are no taxes or other market imperfections The table below shows relevant financial information for the two firms Price per share, $ Number of shares Turf Fence 9.00 4.40 20.000.000 10,000,000 Turf is considering two possible acquisition methods: a share exchange, or a cash acquisition financed by borrowing. The acquisition will result in expected operating cost savings for the merged (post-acquisition) firm with a total present value of $45 million. Reorganisation costs for the merged business will have a present value of $10 million, regardless of the acquisition method. Suppose Turf offers new shares in itself in exchange for Fence's entire 10 million shares (a) What will be the value of the merged firm? What is the maximum number of shares that Turf should offer, such that its existing shareholders will not be worse off? (5 marks) (b) How many new shares should Turf issue to Fence's shareholders, to enable both firms individual shareholders to experience the same proportional increase in their wealth from the acquisition? What is the merged firm's share price? (7 marks) (c) What cash offer would give both firms individual shareholders the same proportional increase in their wealth? (4 marks)
