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Unformatted text preview: Solutions for Chapter 21 Mergers, Acquisitions and Corporate Control 1. a.Merging to achieve economies of scale makes economic sense. b. Merging to reduce risk by diversification does not make economic sense. Shareholders can diversify for themselves. c. Merging to redeploy cash might make economic sense, but note that there are other ways to redeploy excess cash besides using it to purchase another firm. d. Merging to increase earnings per share does not make economic sense. 2. a.True. b. False. c. True. d. True. e. Largely false. While there are some gains from mergers, they do not seem to be substantial. f. False. In a tender offer, the acquirer goes over the heads of management directly to the shareholders. g. False. This is not true when the acquired firm is paid for with stock. 3. a.At a price of $25 per share, Immense will have to pay $25 million to Sleepy. The current value of Sleepy is $20 million and Immense believes it can increase the value by $5 million. So Immense would have to pay the full value of the target firm under the improved management; therefore, the deal would be a zero-NPV proposition for Immense. The deal is just barely acceptable for shareholders of Immense, and clearly attractive for Sleepy's shareholders. Therefore, it can be accomplished on a friendly basis. b. If Sleepy tries to get $28 a share, the deal will have negative NPV to Immense shareholders. There could not be a friendly takeover on this basis. 21-1 4. a.Economic gain = 40 million/0.11 = 363.6 million b. Cost = Cash paid out Haiku value = 1.4 billion $1.1 billion = 0.3 billion = 300 million c.NPV = Economic gain cost = 363.6 million 300 million = 63.6 million d. Post-merger market value = Wasabi Mines value + Haiku value + Economic gain = 2 billion + 1.1 billion + 0.3636 billion = 3.4636 billion Value of shares issued = 0.33 3.4636 billion = 1.1430 billion Cost = Value of shares issued Haiku value = 1.1430 billion 1.1 billion = 0.043 billion = 43 million e.NPV = Economic gain cost = 363.6 million 43 million = 320.6 million 5. A. LBO: Company or business bought out by private investors, largely debt-financed. B. Poison pill: Shareholders are issued rights to buy shares if bidder acquires large stake in the firm. C. Tender offer: Offer to buy shares directly from stockholders. D. Shark repellent: Changes in corporate charter designed to deter unwelcome takeover. E. Proxy contest: Attempt to gain control of a firm by winning the votes of its stockholders. 6. Pre-merger data: Acquiring: Value = 10,000,000 $40 = $400,000,000 Takeover Target: Value = 5,000,000 $20 = $100,000,000 Gain from merger = $25,000,000 The merger gain per share of Takeover Target is: $25 million/5 million shares = $5 Thus, Acquiring can pay up to $25 per share for Target, $5 above the current price....
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This note was uploaded on 10/18/2010 for the course MACAU macau taught by Professor Macau during the Spring '10 term at University of Macau.
- Spring '10