Question

Mergers, Acquisitions, Divestitures Atherley Incorporated (A) is considering acquiring Barrie Corp. (B). Neither firm has any debt. Atherley Incorporated expects the acquisition of Barrie Corp. will generate synergy equal to $10 million per year in after-tax cash flow, indefinitely (a perpetuity). Atherley Incorporated's current market value is $200 million. Barrie Corp.'s current market value is $100 million. The appropriate discount rate, based on the risk of Barrie Corporation, is 10% Atherley Incorporated needs to decide between offering 40% of its stock (after acquisition) or $170 million in cash to Barrie Corp.'s shareholders a) What is the cost of the stock offer? (Hint: First calculate the value of the b) c) target to the acquirer.) What are the NPVs of the stock offer and of the cash offer? Which alternative should X Corporation pursue? Why?

Answer 1

(a) Value of the target to the acquirer = $10 million / 10% =$ 100 million

(b) Value of A after merger = 200+100+100 =$ 400 million ( Current market value of B and synergy)

In case of stock offer, value of stock to be paid to B = 400*40% = $ 160 million

NPV = Total inflows - Cost = 200 - 160 = $40 million

In case of cash offer amount to be paid to B = $ 170 million

NPV = 200-170 = $ 30 million

(c) I am answering the question assuming it as Atherley Incorporated instead of X Corporation. A should follow the stock offer since the NPV is more in that case.