Exam 20: External Growth Through Mergers

In a merger, two or more companies are combined to form an entirely new entity.

Synergy is the greatest and most easily measured nonfinancial benefit in a merger.

Poison pills are usually put in place when one shareholder acquires a certain number of outstanding shares.

The earnings per share impact of a merger are influenced by relative price-earnings ratios and the terms of exchange.

Leveraged buyouts are restricted to "outside" tender offers.

The Prad Corporation is considering a merger with the Stone Company which has 400,000 outstanding shares selling for $25. An investment dealer has advised that to succeed in its merger Prad Corp. would have to offer $45 per share for Stones' stock. Prad Corp. stock is selling for $30. How many shares of Prad Corp. stock would have to be exchanged to acquire all of Stones' stock?

-Alpha has a growth rate in EPS of 12%. Beta's growth rate in EPS is 9%. What is the post-merger growth rate assuming the facts as previously stated? (Assume no Synergy.)

A white knight benefits the:

-Assume Company A pays a 20% premium for Company B in a pooling of interests' transaction. Calculate the post-merger EPS for CompanyA.

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act.

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,000,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years. Aardvark should:

Shareholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

The desire to expand management and marketing capabilities is a financial motive for merging.

Selling shareholders may receive a price well above current market value.

Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because:

The Sheridan Corporation is considering a merger with the Kent Company which has 600,000 outstanding shares selling for $20. An investment dealer has advised that to succeed in its merger Sheridan Corp. would have to offer $40 per share for Kent's stock. Sheridan Corp. stock is selling for $25. How many shares of Sheridan Corp. stock would have to be exchanged to acquire all of Kent's stock?

Which of the following type of merger is most likely to lead to diversification benefits?

The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carry-forward which King Solomon Mining can use over the next two years ($200,000 per year). If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

Company A buys Company B for $3,500,000. Company A had a pre-merger net worth of $8,000,000; Company B's net worth was $2,000,000. The transaction was accounted for as a pooling of interests. Company A wants to write off any available goodwill as slowly as allowable. -Over how many years can goodwill be written off for accounting purposes?