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LOS m: Explain the effects of price and payment method on the distribution of risks and benefits in a merger transaction.

Oak Industries is considering making a bid for Tidy Trim Makers. The following data applies to the analysis:

	Oak Ind.		Tidy Trim
Pre-merger stock price	$55		$80
Number of shares outstanding	$400m		$20m
Pre-merger market value	$22,000m		$1,600m
Estimated synergies		$700m

If Oak Industries is confident that the merger synergies will be at least $700m or greater, the merger price should be between:

A)	$1,600m and $2,300m and be paid for with cash.

B)	$1,600m and $2,300m and be paid for with stock.

C)	$700m and $2,300m and be paid for with cash.

The merger price should fall within the range of the pre-merger value of the target ($1,600m) and the pre-merger value plus the estimated synergies ($2,300m). Since the acquirer is confident that the synergies will be $700m or greater, they will most likely seek to pay in cash so that they capture any upside for themselves.

The theoretical price range for a merger transaction is between the pre-merger price of the target (V_T), and:

A)	V_T + synergies resulting from the merger.

B)	V_T + the takeover premium.

C)	V_T + synergies resulting from the merger – the takeover premium.

Assuming that the true intrinsic values and synergies from the takeover can be correctly estimated, the theoretical price range for a merger transaction is between a low of the pre-merger price of the target (V_T), and a high of V_T + synergies resulting from the merger. At the low, all of the gains from the merger accrue to the acquirer. At the high, all of the gains accrue to the target.

A)	The target assumes some of the risk regarding the value of the synergies.

B)	If the synergies are less than expected, the acquirer will bear the cost.

C)	The target’s payoff is fixed, regardless of the synergies realized.

The target’s payoff is fixed, and the acquirer assumes the risk and the reward regarding the value of the synergies.

Which of the following statements regarding merger synergies are least accurate?

A)	In a stock offer, all of the risks and potential rewards shift to the target.

B)	The more confident the acquirer is that synergies will be realized, the more likely they will make a cash offer.

C)	If estimates regarding the value of the synergies are too high, the target will bear some of the downside.

In a stock offer, some of the risks and potential rewards shift to the target. Both remaining statements are correct as presented.