HuskyGrad2010

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 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) $200m $400m

C) $500m $100m

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

HuskyGrad2010

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

[td=1,1,67] Oak Ind.	[td=1,1,102] Tidy Trim
Pre-merger stock price	$55	[td=1,1,102] $80
Number of shares outstanding	400m	[td=1,1,102] 20m
Pre-merger market value	$22,000m	[td=1,1,102] $1,600m
Estimated synergies	[td=1,1,94] $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.

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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.

HuskyGrad2010

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

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

B) In a stock offer, if estimates regarding the value of the synergies are too high, the target shareholders will bear some of the downside.

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

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

HuskyGrad2010

Which of the following statements regarding a cash offer are least accurate?

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

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

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





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

HuskyGrad2010

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

A) VT + the takeover premium.

B) VT + synergies resulting from the merger – the takeover premium.

C) VT + synergies resulting from the merger.

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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 (VT), and a high of VT + 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

HuskyGrad2010

Based upon long-term stock performance following a merger, academic studies suggest that acquirers:

A) moderately outperform their peers, with slightly more than half exceeding their group.

B) significantly underperform their peers, with more than 60% lagging their group.

C) moderately underperform their peers, with slightly more than half lagging their group.

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Based upon long-term (3-year) performance following a merger, academic studies suggest that acquirers significantly underperform their peers, with more than 60% performing worse than their peer group averages.

HuskyGrad2010

Based upon short-term stock performance around the merger date, academic studies concerning the distribution of the benefits suggest that:

A) the acquirer usually loses value, but the target usually gains value.

B) both parties usually gain value.

C) the target usually loses value, but the acquirer usually gains value.

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Studies based upon short-term stock performance around the merger date suggest that the acquirer loses a small amount of value, while the target makes significant gains.

HuskyGrad2010

Empirical evidence suggests that the majority of the benefits from a merger accrue to the target firm’s shareholders. What does this suggest about the outcome of a competitive bidding process, and what does this imply with regard to the payment strategy and bidding strategy for prospective acquirers? It suggests that the:

A) target’s management is infected with pride, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

B) winner’s curse is real, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

C) winner’s curse is real, that the preferred payment method in competitive bidding should be cash, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

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If the values of the bids are, on average, correct, then the winner has, by definition, overpaid. This is the winner’s curse. Since the empirical evidence suggests that the process is risky for the bidder, the form of payment should be stock so that the risk is shared with the target’s shareholders. The bidder should be prepared to withdraw if the cost exceeds maximum fair value.

HuskyGrad2010

Which of the following statements regarding the distribution of the benefits from a merger are least accurate?

A) Short-term performance around the date of a merger suggests that target management suffers from reference dependence in attempting to extract value for shareholders.

B) Long-term performance following a merger transaction suggests that the acquiring firm is unable to capture the synergies expected prior to the merger.

C) The winners curse implies that in a contested takeover, on average, the winning bidder overpays for the target.

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Short-term performance around the date of a merger suggests that, on average, target shareholders benefit handsomely from the completion of a merger transaction. In fact, they appear to extract all of the benefits of the merger. Reference dependence is a behavioral finance term that does not appear to be applicable to target firm management in the case of mergers

HuskyGrad2010

When a parent company sells a subsidiary or a coherent group of assets with a stated reason to provide a near-term infusion of cash, which method for selling the assets is most likely?

A) Spin-off.

B) Equity carve-out.

C) Divestiture.

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Spin-offs involve the issuance of shares in the new firm, and do not generate cash for the parent company. Hence, this can be ruled out if the intent is an infusion of cash. An equity carve-out will generate cash for the parent when the public offering is completed, but this can take time. A divestiture is typically a sale to another firm for cash, and is likely to be completed much more quickly than a carve-out. Therefore, if the intent is to provide a near-term infusion of cash, a divestiture is most likely.