Exam 24: Mergers and Acquisitions

When a hostile takeover appears to be inevitable,a target company will sometimes look for another,friendlier company to acquire it called a:

Consider two firms,ABC and XYZ.Both companies will either make $5 million or lose $2 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $5 million and the other loses $2 million.The two firms decide to enter into a merger and combine operations.What are the expected after-tax profits of the combined company in any year,assuming a corporate tax rate of 35% and no tax loss carryback or carryforward,if they are run as two independent divisions?

Which of the following is an example of a merger undertaken in order to achieve gains from vertical integration?

What is a conglomerate merger?

Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.What is the change in Bob's earnings per share as a result of the acquisition?

Consider two firms,Blue and Berry.Both companies will either make $30 million or lose $5 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 30% and no tax loss carryback or carryforward?

Sol Company has announced plans to acquire Luna Corporation at a premium of 30% over the pre-announcement share price.Sol is trading for $19 per share,and has a premerger value of $37 billion.Prior to the announcement,Luna was trading for $12 per share,and currently has 192 million shares outstanding.The projected synergies from the merger are $2 billion.What is the maximum exchange ratio that Sol could offer in a stock swap transaction and still generate a positive NPV?

What are risk arbitrageurs? Do their actions represent true arbitrage?

You work for a leveraged buyout firm and are evaluating a potential buyout of Boogle Inc.Boogle's stock price is $18,and it has 3 million shares outstanding.You believe that if you buy the company and replace its dismal management team,its value will increase by 50%.You are planning on doing a leveraged buyout of Boogle and will offer $25 per share for control of the company.Assuming you get 50% control,what will your gain from the transaction be?

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $18 per share and has a premerger value of $950 million,while Mackinac is trading for $30 per share and has a premerger value of $225 million dollars.If Greentree's maximum offer is 2 shares for each Mackinac share,what are the projected synergies from the merger?

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $15.75 per share and has a premerger value of $950 million,while Mackinac is trading for $24 per share and has a premerger value of $225 million dollars.If the projected synergies from the merger are $95 million,what is the maximum cash offer per share that Greentree could make and still generate a positive NPV?

General Mills,a producer of breakfast cereal,has proposed an acquisition of Kellogg,another cereal producer.The combined firm is expected to be able to negotiate a reduced cost for the grain used in its cereal.What type of synergies are the most likely reason behind this merger?

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's earnings per share as a result of the acquisition?

Once a tender offer is announced,the target's share price immediately rises by the amount of the acquisition premium.

Martin Manufacturing has earnings per share (EPS)of $3.00,5 million shares outstanding,and a share price of $32.Martin is considering buying Luther Industries,which has earnings per share of $2.50,2 million shares outstanding,and a share price of $20.Martin will pay for Luther by issuing new shares.There are no expected synergies from the transaction. Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre- and post-merger.

The synergies of a merger add so much value to the combined firm that,upon announcement of a merger,the stock prices of both the target and the acquirer increase substantially.

Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Bob offer Cat's shareholders in exchange for their shares?

What is the difference between a friendly takeover and a hostile takeover?

This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:

What are synergies?