a) Firm A has a total value of US$10 million and firm B has a total value of US$5 million.
If the two firms merge, there will be a cost saving of US$2 million. Calculate any incremental gain from the merger.
b) An excerpt from the financial data of firms A and B is given below. Both firms have agreed to merge with firm B taking over firm A. The exchange ratio for the merger will be 1:3, meaning that the stockholders of A will receive 1 share of firm B in lieu of every 3 shares they currently hold in firm A.
Item Firm A Firm B
P/E Ratio US8.192 US16
Shares Outstanding 96,000 200,000
Earnings US250,000 US800,000
EPS US$2.6042 US4.00
It is estimated that the NPV from the acquisition will be zero, meaning that the benefits and costs of the merger will be equal.
Using the presented information, comment on whether the merger will lead to a growth in earnings for the combined firm.
c) Fill in the following blanks about mergers.
I. If Sears were to acquire one of its appliance suppliers, this would be an example of ________ merger.
II. The acquisition of McDonnell Douglas by Boeing is an example of _____merger.
III. A ___________ creates a brand new firm by merging existing entities.
IV. _________ is the amount of cash or securities that are offered for the merger.
V. A small group of investors buy out all the equity shares of a public firm and the firm becomes a private limited company. This merged arrangement is called _____________.