Page 53 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.k: Evaluate a takeover bid and calculate the estimated post-
acquisition value of an acquirer and the gains accrued to the target READING 25: MERGERS AND ACQUISITIONS
shareholders versus the acquirer shareholders.
Post-Merger Value of an Acquirer MODULE 25.4: BID EVALUATION

EXAMPLE: Giant Foods (GF) is negotiating a friendly acquisition of Kazmaier’s Grocery (KG). They have
tentatively agreed a transaction value of $27 per share for KG’s stock, but still payment method. You, CFA, work
for Kozlowski Inc, the investment banking firm representing GG. The following data is applicable:

Calculate the post-merger value of
(1) the combined firm, (2) gains
accrued to KG, and (3) gains
Gains Accrued to the Target = Premium! accrued to GF, if:
1. Cash offer of $27 per share;
2. Stock offer of 0.75 shares per
share of KG.

Answer Case 1 − Cash Offer:
C = cash price offered × number of shares = $27 × 24 = $648
1) Post merger value of the combined firm: V AT = V + V + S − C = $1,800 + $576 + $120 – $648 = $1,848
A
T
Gains Accrued to the Acquirer – synergies less 2) Gain to target: = Gain = TP = P − V = $648 − $576 = $72 (takeover premium).
T
T
T
premium paid!
3) Gain to acquirer: = S − (P − V ) = $120 − ($648 − $576) = $48
T
T
Gain A = S − TP = S − (P T − V T ) Answer Case 2 − Stock Offer:
0.75 shares for each KG’s share costs (0.75 × $36) = $27, equivalent to the cash offer. But there is dilution!
where:
Gain A = gains accrued to the acquirer’s shareholders
To acquire entire 24 million KGs shares outstanding, GF to issue 24 × 0.75 = 18 million new shares.
Cash Payment vs. Stock Payment
1) Post merger value of the combined firm: V AT = V A + V T + S − C (C = $0 as no cash is paid!)
= $1,800 + $576 + $120 − 0 = $2,496.
Cash offer: Cash paid to the target shareholders (C )
= price paid for the target (P ). Target’s shareholders 2) Gain to target: (Combined no. of shares = 50 + 18 = 68 million)
T
will profit by the amount takeover premium
Gain = Transaction Premium = $660.60 − $576 = $84.60 P = (N × P ) = (18 × $36.70) = $660.60
T
AT
Stock offer: Gains determined in part by the value of T
the combined firm. 3) Gain to acquirer: Gain = S − TP = S − (P − V ) = $120 − ($660.60 − $576) = $35.4 million: Compare!
A
T
T
Dilution effectively reduced GF’s gains because the target was able to share in
the risk and reward of the deal as a result of receiving shares.