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 |
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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.
Which of the following statements concerning the gains from a merger are least accurate?
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In a stock offer, the target shareholder’s gains will generally exceed those from a comparable cash offer. This, of course, depends upon the acquirer’s stock price following the merger. But, if the exchange ratio is based upon the acquirer’s pre-merger price, and if the post-merger price exceeds the pre-merger price, the target’s gains from the stock offer should be greater than those from a cash offer.
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 |
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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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