LOS m: Evaluate a merger bid, calculate the estimated post-merger value of an acquirer, and calculate the gains accrued to the target shareholders versus the acquirer shareholders.

Q1. Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:

If Big Steel buys Small Steel for $110 per share in cash, what are the gains to Big Steel and Small Steel, respectively?

          Big Steel                               Small Steel

A)   $400m                                  $200m

B)   $500m                                 $100m

C)   $200m                                 $400m

Q2. Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:

If Big Steel buys Small Steel by exchanging 1.45 shares of its stock for each share of Small Steel, what are the gains to Big Steel and Small Steel, respectively?

          Big Steel                               Small Steel

A)   $223.9m                              $376.1m

B)   $100.8m                              $491.3m

C)   $246.2m                              $353.8m

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LOS m: Evaluate a merger bid, calculate the estimated post-merger value of an acquirer, and calculate the gains accrued to the target shareholders versus the acquirer shareholders. fficeffice" />

Q1. Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:

	Big Steel		Small Steel
Pre-merger stock price	$75		$100
Number of shares outstanding	ffice:smarttags" />500m		40m
Pre-merger market value	$37,500m		$4,000m
Estimated synergies		$600m

If Big Steel buys Small Steel for $110 per share in cash, what are the gains to Big Steel and Small Steel, respectively?

          Big Steel                               Small Steel

A)   $400m                                  $200m

B)   $500m                                 $100m

C)   $200m                                 $400m

Correct answer is C)

Gains to Small Steel = takeover premium = $4,400 – $4,000 = $400m.
Gains to Big Steel = synergies – takeover premium = $600 – $400 = $200.

Q2. Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:

	Big Steel		Small Steel
Pre-merger stock price	$75		$100
Number of shares outstanding	500m		40m
Pre-merger market value	$37,500m		$4,000m
Estimated synergies		$600m

If Big Steel buys Small Steel by exchanging 1.45 shares of its stock for each share of Small Steel, what are the gains to Big Steel and Small Steel, respectively?

          Big Steel                               Small Steel

A)   $223.9m                              $376.1m

B)   $100.8m                              $491.3m

C)   $246.2m                              $353.8m

Correct answer is A)

Value after takeover = $37,500 + $4,000 + $600 = $42,100m.
Shares exchanged for Small Steel = 1.45 × 40m = 58m.
Post-takeover share price = value after takeover / shares outstanding = 42,100m / 558m = $75.45.
Takeover price = number of shares to small steel × post-takeover share price = 58m × $75.45 = $4,376.1m.
Gains to Small Steel = takeover premium = $4,376.1 – $4,000 = $376.1m.
Gains to Big Steel = synergies – takeover premium = $600 – $376.1 = $223.9m.

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