Page 59 - FINAL CFA II SLIDES JUNE 2019 DAY 6

Cash Payment vs. Stock Payment
In addition to the price paid, the ultimate gain to the acquirer or the READING 25: MERGERS AND ACQUISITIONS
target is also affected by the choice of payment method. Different
methods of payment will give the acquirer and the target different risk
exposures with respect to misestimating the value of synergies. MODULE 25.4: BID EVALUATION

With a cash offer, the target firm’s shareholders will profit by the amount takeover premium). With a stock offer, the gains will be determined in part by the
value of the combined firm. Accordingly, for a stock deal we must adjust our formula for the price of the target:

Answer Case 1 − Cash Offer:
Post merger value of the combined firm: V AT = V + V + S − C
A
T
V = $1,800
A
V = $576
T
S = $120
C = cash price offered × number of shares = $27 × 24 = $648
The value of the combined firm is V AT = $1,800 + $576 + $120 − $648 = $1,848.
EXAMPLE: Evaluating a merger bid: Giant Foods and Kazmaier’s
Grocery are negotiating a friendly acquisition of Kazmaier’s by Giant Foods. Gain to target: = Gain = TP = P − V = $648 − $576 = $72 (takeover premium).
T
T
T
The management teams at both companies have tentatively agreed upon a
transaction value of about $27 per share for Kazmaier’s stock, but are Gain to acquirer: = S − (P − V ) = $120 − ($648 − $576) = $48 (value of synergies in the
T
T
presently negotiating alternative methods of payment. Jennifer Nagy, CFA, deal less the takeover premium paid to Kazmaier’s shareholders).
works for Kozlowski Inc, the investment banking firm representing Giant
Foods. Nagy has compiled the data in the following figure to analyze the
transaction. Answer Case 2 − Stock Offer:
0.75 shares for each share of K’s = (0.75 × $36) = $27, appears equivalent to the cash
offer.
However, the results are different because there is dilution when GF issues new stock!
Given 24 million K’s shares outstanding, GF to issue 24 × 0.75 = 18 million new shares.

Post merger value of the combined firm: V AT = V + V + S − C
T
A
V = $1,800
A
V = $576
T
S = $120
C = $0 because no cash is changing hands
Calculate the post-merger value of the combined firm, gains accrued to the
target, and gains accrued to the acquirer under the following scenarios: The value of the combined firm is V AT = $1,800 + $576 + $120 − 0 = $2,496.
•Case 1: Cash offer of $27 per share for Kazmaier’s stock.
•Case 2: Stock offer of 0.75 shares of Giant Foods stock per share of Gain to target: To account for the dilution and find the price per share for the combined
Kazmaier’s. firm, P , divide the post-merger value by the post-merger number of shares outstanding.
AT
Since 18 million new shares were issued, the total shares outstanding for GF is (50 + 18)
= 68 million.