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

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

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

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

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

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

Which of the following statements concerning the gains from a merger are least accurate?

A) In a stock offer, gains to the target shareholders are dependent upon the post-merger stock price of the acquirer.

B) In a stock offer, the target shareholder’s gains are less than those from a comparable cash offer.

C) In a cash offer, the target shareholder’s gains are capped at the amount of the takeover premium.

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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.

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 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) $100.8m $491.3m


B) $223.9m $376.1m


C) $246.2m $353.8m






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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

HuskyGrad2010

An analyst has identified three companies that have recently been taken over which they believe are comparable to a firm under evaluation as a takeover candidate. The relative value measures that they have selected are the price-to-earnings (P/E) and price-to-cash flow (P/CF), and the average values of these ratios are 11.2 and 8.6. The target firm has earnings per share of $2.45, and cash flow per share of $3.05. What is the estimated takeover price per share?

A) $27.44.

B) $26.23.

C) $26.84.

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The estimated value based upon P/E is $27.44 = (2.45 × 11.2).
The estimated value based upon P/CF is $26.23 = (3.05 × 8.6).
The estimated takeover price is the average of these two values: $26.84.

HuskyGrad2010

The quick change oil industry has been in a consolidation phase for about a decade, during which time the number of firms has shrunk from more than 50 to 15. An analyst is evaluating one of the remaining 15 firms as an acquisition target, and has come up with the following estimated acquisition prices:

Methods of Analysis	Price per Share
Discounted CF	$50
Comparable Company	$48
Comparable Transaction	$57

Under the circumstances, which of these estimates is most likely to represent the ultimate acquisition cost, and why?

A) Comparable transaction, because a sufficient number of transactions have occurred for intrinsic value to be relatively well-understood by market participants.

B) Comparable company, because there is a large enough sample to ensure that valuation is correct, on average.

C) Discounted cash flow (CF), because this considers expectations for the future as well as current data.

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Given the large number of acquisitions that have occurred in the industry, comparable transaction is likely to provide the most reliable estimate of the ultimate acquisition price. Comparable company analysis is certainly a viable method to estimate value, but still requires the analyst to estimate the takeover premium. This step is unnecessary when using the comparable transaction approach. Discounted CF valuation is also a viable method, but, in the presence of numerous comparable firms and transactions, logic suggests that the market-based valuation provided by the comparable transaction approach is more likely to produce superior results.