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Pricing issues and post-transaction issues

Example 3

Post-tax profit P/E ratio Pre-acq. value

Company C $10m 16 $160m

Company D $1m 8 $8m

Required:

If Company C takes over Company D, what is the post-acquisition value
of the combined company (estimated by applying the bootstrapping
method)?

Solution

Bootstrapping is based on the assumption that the market will assume that the
management of the larger company will be able to apply common approach to
both companies after the takeover, thus improving the performance of the
acquired company by using the methods that they have been using on their
own company before the takeover.

Value of (C+D) post-acquisition = 16 × ($10m + $1m) = $176m

Thus, the value of the synergy is this combined value, less the values of the
individual companies pre-acquisition, i.e. $176m – $160m – $8m = $8m

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