mergers and acquisition
Gryphon Corp. is analyzing the possible acquisition of Hawk Co. Gryphon Corp. has 3 million shares
outstanding, selling at $50 per share. Hawk Co. has 1 million shares outstanding, selling at $35 a
share. The forecasts of Gryphon Corp. show that the purchase would increase its annual after-tax
free cash flow by $2 million next year and the Free Cash Flows will grow at a rate of 2% per year
indefinitely. The appropriate discount rate for the incremental cash flows is 7.50 percent.
a. What is the value of the economic gain from the merger?
b. Suppose Gryphon decides to offer $50 million in cash to Hawk. What are the cost and the
NPV of the merger?
c. Suppose instead that Gryphon offers Hawk shareholders a 25 percent holding in Gryphon.
What are the cost and NPV of the merger in that case?
d. Should Gryphon should choose a cash or a stock merger? Explain briefly.
e. Suppose the synergies are not realized and there is no gain in value. What will be the gain
or loss to Hawk and Gryphon shareholders with a cash acquisition? With a stock
acquisition?
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