Wasabi is contemplating purchase of Haiku. The market value of the 2 companies are RM20 billion and RM11 billion, respectively. Wasabi thinks that the combined companies can cut operating costs by RM450 million per year, in perpetuity. Wasabi thinks that a successful cash bid will probably cost RM14 billion. It is also considering offering Haiku shareholders a 33% in the merged firm. Suppose the cost of cost of capital is 11%.

(a) What is the NPV to Wasabi? How does the NPV depend on whether the offer is for cash or stock? Should Wasabi go ahead?

(b) Could a decision to offer stock instead of cash for Haiku signal a lack of confidence by Wasabis managers in the stock-market valuation of their company? How would this affect the choice of financing and the odds of a successful transaction?