Natsam Corporation has 10 million shares outstanding and is trading at $20 per share. Natsam Corporation plans to buy Clovix Corporation, which has 4.5 million shares outstanding and a price per share of $16. Natsam Corporation will pay for Clovix Corporation by issuing new shares (i.e stock exchange deal). The merger is expected to increase the annual free cash flows of the combined firm by $0.9 million for the first 3 years starting one year from today and then the increase in the annual free cash flows grows at 0.8% perpetually afterwards. The cost of capital for the combined firm is expected to be 16%. a. As Natsam Corporation's financial advisor, what is the maximum stock exchange ratio you would suggest to your client in negotiating with the target firm so that the deal generates a positive NPV for your client? What is the implied maximum number of shares Natsam Corporation is willing to issue in exchange for all the outstanding shares of Clovix Corporation (Round up to the nearest integer)? [12 points] b. Natsam Corporation announces that it will swap 0.8541 its share for each share of Clovix Corporation. Upon this merger announcement, Natsam Corporation's share trades at $19.80 per share and Clovix Corporation's share trades at $16.74 per share. As a junior analyst working at Paulson & Co., a hedge fund specialized in event driven strategy, you decide to exploit this merger arbitrage opportunity. Please describe your merger arbitrage strategies concisely (i.e. lay out how you Enter position and how you Close your position) and calculate the expected arbitrage profits based on your strategy (assume no transaction costs, no trading on derivatives, and no partial share trading). [16 points] Natsam Corporation has 10 million shares outstanding and is trading at $20 per share. Natsam Corporation plans to buy Clovix Corporation, which has 4.5 million shares outstanding and a price per share of $16. Natsam Corporation will pay for Clovix Corporation by issuing new shares (i.e stock exchange deal). The merger is expected to increase the annual free cash flows of the combined firm by $0.9 million for the first 3 years starting one year from today and then the increase in the annual free cash flows grows at 0.8% perpetually afterwards. The cost of capital for the combined firm is expected to be 16%. a. As Natsam Corporation's financial advisor, what is the maximum stock exchange ratio you would suggest to your client in negotiating with the target firm so that the deal generates a positive NPV for your client? What is the implied maximum number of shares Natsam Corporation is willing to issue in exchange for all the outstanding shares of Clovix Corporation (Round up to the nearest integer)? [12 points] b. Natsam Corporation announces that it will swap 0.8541 its share for each share of Clovix Corporation. Upon this merger announcement, Natsam Corporation's share trades at $19.80 per share and Clovix Corporation's share trades at $16.74 per share. As a junior analyst working at Paulson & Co., a hedge fund specialized in event driven strategy, you decide to exploit this merger arbitrage opportunity. Please describe your merger arbitrage strategies concisely (i.e. lay out how you Enter position and how you Close your position) and calculate the expected arbitrage profits based on your strategy (assume no transaction costs, no trading on derivatives, and no partial share trading). [16 points]
