Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now and grow at 2.5% a year. Also, the analyst is assuming an after-tax integration cost of 0.75 billion and taxes of 20%. Assume that the integration cost of 0.75 billion happens when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies. Company B's equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B. Compute the value of the synergy (In $ Million) as estimated by the analyst. (Please show your calculations in Detail). Does the estimate of synergies in A, justify the premium that company A offered to company B? (Please briefly explain the rationale in Detail).
Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now and grow at 2.5% a year. Also, the analyst is assuming an after-tax integration cost of 0.75 billion and taxes of 20%. Assume that the integration cost of 0.75 billion happens when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies. Company B's equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B. Compute the value of the synergy (In $ Million) as estimated by the analyst. (Please show your calculations in Detail). Does the estimate of synergies in A, justify the premium that company A offered to company B? (Please briefly explain the rationale in Detail).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now and grow at 2.5% a year. Also, the analyst is assuming an after-tax integration cost of 0.75 billion and taxes of 20%. Assume that the integration cost of 0.75 billion happens when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies. Company B's equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B.
- Compute the value of the synergy (In $ Million) as estimated by the analyst.
(Please show your calculations in Detail).
- Does the estimate of synergies in A, justify the premium that company A offered to company B? (Please briefly explain the rationale in Detail).
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