Page 58 - 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.
MODULE 25.4: BID EVALUATION
Post-Merger Value of an Acquirer

Gains Accrued to the Target
In most merger transactions, acquirers must pay a takeover premium to
entice the target’s shareholders to approve the merger. The target
company’s management will try to negotiate the highest possible
premium relative to the value of the target company. From the target’s
perspective, the takeover premium is the amount of compensation
received in excess of the pre-merger value of the target’s shares, or:

Gains Accrued to the Acquirer
Acquirers are willing to pay a takeover premium because they expect to
generate their own gains from any synergies created by the transaction.
The acquirer’s gain is therefore equal to the synergies received less the
premium paid to the target’s shareholders, or:

Gain = S − TP = S − (P − V )
T
A
T
where:
Gain = gains accrued to the acquirer’s shareholders
A
Note that in a cash deal the cash paid to the target shareholders (C ) is equal
to the price paid for the target (P ).
T