this question is from a study guide and is not an exam question please dont flag my account

2. Delta Airlines and Northwest Airlines are negotiating a friendly acquisition of Northwest Airlines by Delta Airlines. The management teams at both companies have informally agreed upon a transaction value of about $9.90 per share of Northwest Airlines stock but are presently negotiating alternative forms of payment. Ralph Stefan, DFA, works for an investment banking team which is evaluating three alternative offers presented by Delta Airlines 1. Cash Offer: Delta Airlines will pay $ 10.00 per share of Northwest Airlines Stock. 2. Stock Offer: Delta Airlines will give Northwest Airlines shareholders 1.25 of Delta Airlines stock per share of Northwest Airlines stock. 3. Mixed Offer: Delta Airlines will pay $8.00 plus 0.25 shares of Delta Airlines stock per share of Northwest Airlines stock. Ralph estimates that the merger of the two companies will result in economies of scale which is expected to earn synergies of $2 billion dollars annually for the next four years. To aid in the analysis, Ralph has also compiled the following data: Pre-merger Stock Price Number of Shares Outstanding (millions) Pre-merger Market Value (millions) The WACC is estimated to be 10.5%. Delta Airlines $8.00 396 $3168 Northwest Airlines $10.00 270 $2700

2. Delta Airlines and Northwest Airlines are negotiating a friendly acquisition of Northwest Airlines by Delta Airlines. The management teams at both companies have informally agreed upon a transaction value of about $9.90 per share of Northwest Airlines stock but are presently negotiating alternative forms of payment. Ralph Stefan, DFA, works for an investment banking team which is evaluating three alternative offers presented by Delta Airlines 1. Cash Offer: Delta Airlines will pay $10.00 per share of Northwest Airlines Stock. 2. Stock Offer: Delta Airlines will give Northwest Airlines shareholders 1.25 of Delta Airlines stock per share of Northwest Airlines stock. 3. Mixed Offer: Delta Airlines will pay $8.00 plus 0.25 shares of Delta Airlines stock per share of Northwest Airlines stock. Ralph estimates that the merger of the two companies will result in economies of scale which is expected to earn synergies of $2 billion dollars annually for the next four years. To aid in the analysis, Ralph has also compiled the following data: The WACC is estimated to be 10.5%. Delta Airlines is somewhat concerned whether antitrust regulators would consider the acquisition of Northwest Airlines an antitrust violation. The market in which the two Airlines operate consists of eight competitors. The largest company has a 25 percent market share. Delta has the second largest market share of 20 percent. Five companies. including Northwest Airlines, each have a market share of 10 percent. The smallest Airline has a 5 percent market share. a) Based only on the information given, which of the three offers should Ralph recommend to the Northwest Airlines Software Solutions management team? Please show your calculations for the three offers. ( 6 points) If Delta Airlines and Northwest Airlines 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? ( 4 points)