Exam 14: Applying Financial Modeling

Real Cool Autos acquired Automotive Industries in a transaction that produced an NPV of $3.7 million. This NPV represents

Mars Buys Wrigley in One Sweet Deal Under considerable profit pressure from escalating commodity prices and eroding market share, Wrigley Corporation, a U.S.-based leader in gum and confectionery products, faced increasing competition from Cadbury Schweppes in the U.S. gum market. Wrigley had been losing market share to Cadbury since 2006. Mars Corporation, a privately owned candy company with annual global sales of $22 billion, sensed an opportunity to achieve sales, marketing, and distribution synergies by acquiring Wrigley Corporation. On April 28, 2008, Mars announced that it had reached an agreement to merge with Wrigley Corporation for $23 billion in cash. Under the terms of the agreement, which were unanimously approved by the boards of the two firms, shareholders of Wrigley would receive $80 in cash for each share of common stock outstanding, a 28 percent premium to Wrigley's closing share price of $62.45 on the announcement date. The merged firms in 2008 would have a 14.4 percent share of the global confectionary market, annual revenue of $27 billion, and 64,000 employees worldwide. The merger of the two family-controlled firms represents a strategic blow to competitor Cadbury Schweppes's efforts to continue as the market leader in the global confectionary market with its gum and chocolate business. Prior to the announcement, Cadbury had a 10 percent worldwide market share. As of the September 28, 2008 closing date, Wrigley became a separate stand-alone subsidiary of Mars, with $5.4 billion in sales. The deal is expected to help Wrigley augment its sales, marketing, and distribution capabilities. To provide more focus to Mars's brands in an effort to stimulate growth, Mars would in time transfer its global nonchocolate confectionery sugar brands to Wrigley. Bill Wrigley Jr., who controls 37 percent of the firm's outstanding shares, remained the executive chairman of Wrigley. The Wrigley management team also remained in place after closing. The combined companies would have substantial brand recognition and product diversity in six growth categories: chocolate, nonchocolate confectionary, gum, food, drinks, and pet care products. While there is little product overlap between the two firms, there is considerable geographic overlap. Mars is located in 100 countries, while Wrigley relies heavily on independent distributors in its growing international distribution network. Furthermore, the two firms have extensive sales forces, often covering the same set of customers. While mergers among competitors are not unusual, the deal's highly leveraged financial structure is atypical of transactions of this type. Almost 90 percent of the purchase price would be financed through borrowed funds, with the remainder financed largely by a third-party equity investor. Mars's upfront costs would consist of paying for closing costs from its cash balances in excess of its operating needs. The debt financing for the transaction would consist of $11 billion and $5.5 billion provided by J.P. Morgan Chase and Goldman Sachs, respectively. An additional $4.4 billion in subordinated debt would come from Warren Buffet's investment company, Berkshire Hathaway, a nontraditional source of high-yield financing. Historically, such financing would have been provided by investment banks or hedge funds and subsequently repackaged into securities and sold to long-term investors, such as pension funds, insurance companies, and foreign investors. However, the meltdown in the global credit markets in 2008 forced investment banks and hedge funds to withdraw from the high-yield market in an effort to strengthen their balance sheets. Berkshire Hathaway completed the financing of the purchase price by providing $2.1 billion in equity financing for a 9.1 percent ownership stake in Wrigley. -Given the terms of the agreement, Wrigley shareholders would own what percent of the combined companies? Explain your answer

Dow Chemical, a leading manufacturer of chemicals, announced that they had an agreement to acquire competitor Rhom and Haas Company. Dow expects to broaden its current product offering by offering the higher margin Rohm and Haas products. What would you identify as possible synergies between these two businesses? In what ways could the combination of these two firms erode combined cash flows?

Mars Buys Wrigley in One Sweet Deal Under considerable profit pressure from escalating commodity prices and eroding market share, Wrigley Corporation, a U.S.-based leader in gum and confectionery products, faced increasing competition from Cadbury Schweppes in the U.S. gum market. Wrigley had been losing market share to Cadbury since 2006. Mars Corporation, a privately owned candy company with annual global sales of $22 billion, sensed an opportunity to achieve sales, marketing, and distribution synergies by acquiring Wrigley Corporation. On April 28, 2008, Mars announced that it had reached an agreement to merge with Wrigley Corporation for $23 billion in cash. Under the terms of the agreement, which were unanimously approved by the boards of the two firms, shareholders of Wrigley would receive $80 in cash for each share of common stock outstanding, a 28 percent premium to Wrigley's closing share price of $62.45 on the announcement date. The merged firms in 2008 would have a 14.4 percent share of the global confectionary market, annual revenue of $27 billion, and 64,000 employees worldwide. The merger of the two family-controlled firms represents a strategic blow to competitor Cadbury Schweppes's efforts to continue as the market leader in the global confectionary market with its gum and chocolate business. Prior to the announcement, Cadbury had a 10 percent worldwide market share. As of the September 28, 2008 closing date, Wrigley became a separate stand-alone subsidiary of Mars, with $5.4 billion in sales. The deal is expected to help Wrigley augment its sales, marketing, and distribution capabilities. To provide more focus to Mars's brands in an effort to stimulate growth, Mars would in time transfer its global nonchocolate confectionery sugar brands to Wrigley. Bill Wrigley Jr., who controls 37 percent of the firm's outstanding shares, remained the executive chairman of Wrigley. The Wrigley management team also remained in place after closing. The combined companies would have substantial brand recognition and product diversity in six growth categories: chocolate, nonchocolate confectionary, gum, food, drinks, and pet care products. While there is little product overlap between the two firms, there is considerable geographic overlap. Mars is located in 100 countries, while Wrigley relies heavily on independent distributors in its growing international distribution network. Furthermore, the two firms have extensive sales forces, often covering the same set of customers. While mergers among competitors are not unusual, the deal's highly leveraged financial structure is atypical of transactions of this type. Almost 90 percent of the purchase price would be financed through borrowed funds, with the remainder financed largely by a third-party equity investor. Mars's upfront costs would consist of paying for closing costs from its cash balances in excess of its operating needs. The debt financing for the transaction would consist of $11 billion and $5.5 billion provided by J.P. Morgan Chase and Goldman Sachs, respectively. An additional $4.4 billion in subordinated debt would come from Warren Buffet's investment company, Berkshire Hathaway, a nontraditional source of high-yield financing. Historically, such financing would have been provided by investment banks or hedge funds and subsequently repackaged into securities and sold to long-term investors, such as pension funds, insurance companies, and foreign investors. However, the meltdown in the global credit markets in 2008 forced investment banks and hedge funds to withdraw from the high-yield market in an effort to strengthen their balance sheets. Berkshire Hathaway completed the financing of the purchase price by providing $2.1 billion in equity financing for a 9.1 percent ownership stake in Wrigley. -Speculate as to the potential sources of synergy associated with the deal. Based on this speculation what additional information would you want to know in order to determine the potential value of this synergy?

Using the M&A Valuation & Deal Structuring Model accompanying this text and the data contained in thecells as a starting point, complete the following: a. On the Valuation worksheet, what is the enterprise and equity value of Target on the Valuation Worksheet? b. On the worksheet named Target Assumptions, decrease COGS (cost of goods sold) as a percent of sales by one percentage point on the Target Assumptions Worksheet. What is the impact on the Target's enterprise and equity values? (Hint: See Valuation Worksheet) Close Model but do not save results.

A clear statement of all assumptions underlying the model's projections forces the analyst to display their biases and to be prepared to defend their assumptions to others.

A merger which is expected to produce synergy

Non-compliance with environmental laws, product liabilities, pending lawsuits, poor product quality, patents, poorly written or missing customer contracts, and high employee turnover are all considered destroyers of value.

Tribune Company Acquires the Times Mirror Corporation in a Tale of Corporate Intrigue Background: Oh, What Tangled Webs We Weave. . . CEO Mark Willes had reason to be optimistic about the future. Operating profits had grown at a double-digit rate, and earnings per share had grown at a 55% annual rate between 1995 to 1999. Many shareholders appeared to be satisfied. However, some were not. Although pleased with the improvement in profitability, they were concerned about the long-term growth prospects of the firm. Reflecting this disenchantment, Times Mirror's largest shareholder, the Chandler family, was contemplating the sale of the company and along with it the crown jewel Los Angeles Times. It had been assumed for years that the Chandler family trusts made a sale of Times Mirror out of the question. The Chandler's super voting stock (i.e., stock with multiple voting rights) allowed them to exert a disproportionate influence on corporate decisions. The Chandler Trusts controlled more than two-thirds of voting shares, although the family owned only about 28% of the total shares of the outstanding stock. In May 1999 the Tribune Chairman John Madigan contacted Willes and made an offer for the company, but Willes, with the help of his then-chief financial officer (CFO), Thomas Unterman, made it clear to Madigan that the company was not for sale. What Willes did not realize was that Unterman soon would be serving in a dual role as CFO and financial adviser to the Chandlers and that he would eventually step down from his position at Times Mirror to work directly for the family. In his dual role, he worked without Willes' knowledge to structure the deal with the Tribune. Following months of secret negotiations, the Chicago-based Tribune Company and the Times Mirror Corporation announced a merger of the two companies in a cash and stock deal valued at approximately $7.2 billion, including $5.7 billion in equity and $1.5 billion in assumed debt. The transaction, announced March 13, 2000, created a media giant that has national reach and a major presence in 18 of the nation's top 30 U.S. markets, including New York, Los Angeles, and Chicago. The combined company has 22 television stations, four radio stations, and 11 daily newspapers-including the Los Angeles Times, the nation's largest metropolitan daily newspaper and flagship of the Times Mirror chain. Transaction Terms: Tribune Shareholders Get Choice of Cash or Stock The Tribune agreed to buy 48% of the outstanding Times Mirror stock, about 28 million shares, through a tender offer. After completion of the tender offer, each remaining Times Mirror share would be exchanged for 2.5 shares of Tribune stock. Under the terms of the transaction, Times Mirror shareholders could elect to receive $95 in cash or 2.5 shares of Tribune common stock in exchange for each share of Times Mirror stock. Holders of 27.2 million shares of Times Mirror stock elected to receive Tribune stock, whereas holders of 10.6 million elected to receive cash. Because the amount of cash offered in the merger was limited and the cash election was oversubscribed, Times Mirror shareholders electing to receive cash actually received a combination of cash and stock on a pro rata basis (Table 1). Table 1. Times Mirror Transaction Terms As of June 12,2000 Transaction Value Times Mirror Shares Outstanding @ 3/13/00 59.700.000 No. of Times Mirror Shares Exchanged for 2.3 Shares of Tribune Stock 27,238,253 \ 2,587,634,03 No. of Times Mirror Shares Exchanged for Cash 10,648,318 \ 1,011,536,96 Times Mirror Shares Outstanding after Tender Offer 21,813,429 No. of New Tribune Shares Issued for Remaining Times Mirror Shares 54,533,57 \ 2,072,275,774 Equity Value of Offer \ 5,671,446,777 Market Value of Times Mirror on Merger Announcement Date \ 2,805,900,000 Premium 102\% 27,238,253\times2.5\times\ 38/ share of Tribune stock. \ 41.70 in cash +1.4025 shares of Tribune stock \times\ 38 per share for each Times Mirror shareremaining \times 10,648,318 . Equals 2.5 shares \times21,813,429\times\ 38 per Tribune share. Times Mirror share price on announcement date of \ 47 times 59,700,000 . The total number of new Tribute shares issued equals 27,238,318\times2.5+10,648,318\times2.5+54,533,573 or 137,537,013 . Newspaper Advertising Revenues Continue to Shrink Most U.S. newspapers are mired in the mature or declining phase of their product life cycle. For the past half-century, newspapers have watched their portion of the advertising market shrink because of increased competition from radio and television. By the early 1990s, all major media began taking a significant hit in their advertising revenue streams as businesses discovered that direct mail could target their message more precisely. Moreover, consolidation among major retailers further reduced the size of advertising dollar pool. The same has happened with numerous large supermarket chain mergers. Newspaper advertising revenues also have been threatened by increasing competition from advertising and editorial content delivered on the internet. Finally, newspapers simply have become less attractive places to advertise as readership continues to decline as a result of an aging population and new generations that do not see newspapers as relevant. Times Mirror: A Largely Traditional Business Model As essentially a traditional newspaper, Times Mirror publishes five metropolitan and two suburban daily newspapers, a variety of magazines, and professional information such as flight maps for commercial airline pilots. The Los Angeles Times, a southern California institution founded in 1881, is Times Mirror's largest holding and operates some two dozen expensive foreign news bureaus-more than any other newspaper in the country. The Los Angeles Times has more than 1200 Los Angeles Times reporters and editors around the world (CNNfn, March 13, 2000). Tribune Company Profile: The Face of New Media? Unlike the Times Mirror, Tribune has built its strategy around four business groups: broadcasting, publishing, education, and interactive. The Tribune is also an equity investor in America Online and other leading internet companies, underscoring the company's commitment to new-media technologies. Applying leading edge new-media technology has allowed the Tribune to transform they way it does business, and the technology commitment creates the opportunity for future growth. The internet has been the greatest driver for change, and the Tribune's interactive business group continues to focus on capitalizing on emerging Web technologies. Throughout the company, new technologies have been applied aggressively to create new products, improve existing products, and make operations more efficient. The Tribune's non-newspaper revenues accounted for more than half of its earnings by 2000. Anticipated Synergy Cost Savings: Opportunities Abound Cost savings are expected because of the closing of selected foreign and domestic news bureaus, a reduction in the cost of newsprint through greater volume purchases, the closing of the Times Mirror corporate headquarters, and elimination of corporate staff. Such savings are expected to reach $200 million per year (Table 2). Table 2. Annual Merge-Related Cost Savings Source of Value Annual Savings Bureau Closings \ 73,000,000 Newsprint Savings \ 93,000,000 Other Office Closings (e.g., Corporate Office in Los Angeles) \ 34,000,000 Total Annual Savings \ 200,000,000 ${ }^{1}$ Assumes Tribune will close overlapping bureaus in United States (9) and most of the Times Mirror's foreign bureaus ( 21 abroad). ${ }^{2}$ As a result of bulk purchasing and more favorable terms with different suppliers, $15 \%$ of the newsprint expense of the combined companies is expected to be saved. ${ }^{3}$ Layoffs of 120 L.A. Times Mirror Corporate Office personnd at an average salary of $\$ 125,000$ and benefits equal to $30 \%$ of base salaries. Total payroll expenses equal $\$ 19,500,000$ (i. e., $\$ 125,000 \times 1.3 \times 120$ ). Lease, travel and entertainment, and other support expenses added another $\$ 14.5$ million. Source: Moore, Kathryn, Tim Schnabel, and Mark Yemma, "A Media Marriage," paper prepared for Chapman University, EMBA 696, May 18, 2000, p. 9. Revenue: Great Potential . . . But Is It Achievable? The combined companies will have a major presence in 18 of the nation's top 30 U.S. advertising markets, including New York, Los Angeles, and Chicago. The combined companies provide unprecedented opportunities for advertisers to reach major market consumers in any media form-broadcast, newspapers, or interactive. In addition, the combined companies will benefit consumers by giving them rich and diverse choices for obtaining the news, information, and entertainment they want anytime, anywhere. These factors provide an increased ability to capture national advertising in the most important U.S. population centers. The significantly greater breadth of the combined firm's geographic coverage is expected to boost advertising revenues from about 3% to 6% annually. Integration Challenges: Cultural Warfare? Based on the current, traditional culture found at the Los Angeles Times and other Times Mirror properties, integration following the merger was likely to be slow and painful. Concerns among journalists about spreading their talents thin across three or four media-print, television, online, and radio-in the course of a day's work raised the stress level. Although the Tribune has been able to make the transition to a largely multimedia company more rapidly than the more traditional newspapers, it has been costly. For example, development losses in 1999 were $30-35 million at Chicagotribune.com and an estimated $45 million in 2000. The bleeding was expected to continue for some time and to constitute a major distraction for the management of the new company. Financial Analysis The present values of the Tribune, Times Mirror, and the combined firms are $8.5 billion, $2.4 billion, and $16.5 billion, respectively; the estimated present value of synergy is $5.6 billion (Table 3). This assumes that pretax cost savings are phased in as follows: $25 million in 2000, $100 million in 2001, and $200 million thereafter. The cost savings are net of all expenses related to realizing such savings such as severance, lease buyouts, and legal fees. Table 4 describes how the initial offer price could have been determined and the postmerger distribution of ownership between Times Mirror and Tribune shareholders. Table 4. Offer Price Determination Tribune Times Mirror Combined Incl. Synergy Value of Synergy Equity Valuations 8501.5 2375.0 16443.7 5567.3 Minimum Offer 2805.9 Maximum Offer Price 8373.2 Actual Offer Price 5671.4 \% Maximum Offer 67.7\% Price Purchase Price Premium 1.02 New Tribune Shares Issued 137.50 Ownership Distribution TM Shareholders 0.37 Tribune Shareholders 0.63 ${ }^{1} \text { Market value of Times Mirror on the merger announcement date. }$ Epilogue Only time will tell if actual returns to shareholders in the combined Tribune and Times Mirror company exceed the expected financial returns provided in the valuation models in this case study. Times Mirror shareholders earned a substantial 102% purchase price premium over the value of their shares on the day the merger was announced. Some portion of those undoubtedly "cashed out" of their investment following receipt of the new Tribune shares. However, for those former Times Mirror shareholders continuing to hold their Tribune stock and for Tribune shareholders of record on the day the transaction closed, it is unclear if the transaction made good economic sense. : -The estimated equity value for the Times Mirror Corporation on the day the merger was announced was about $2.8 billion. Moreover, as shown in the offer price evaluation table, the equity value estimated using discounted cash flow analysis is given has $2.4 billion. Why is the minimum offer price shown as $2.8 billion rather than the lower $2.4 billion figure? How is the maximum offer price determined in the Offer Price Evaluation Table? How much of the estimated synergy value generated by combining the two businesses is being transferred to the Times Mirror shareholders? Why?

What is the fully diluted offer price (equity value) for a tender offer made to acquire a target whose pre- tender shares are trading for $1.50 per share? The tender offer includes a 30% premium to the target's pre-tender share price. The target has basic shares outstanding of 70 million and 5 million options which may be converted into common shares at $1.60 per share.

M&A valuation and deal structuring models commonly require the estimation of the standalone value of target firm but never the acquirer.

Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms, including the effects of synergy, and the value of the target firm including the effects of synergy.

Which of the following is most true about synergy in the context of M&A?

The number of new acquirer shares that must be issued to complete a deal is unaffected by such derivative securities as options issued to Target's employees and warrants, as well as convertible securities.

Factors destroying firm value following a merger or acquisition could include all but which of the following:

Ford Acquires Volvo’s Passenger Car Operations This case illustrates how the dynamically changing worldwide automotive market is spurring a move toward consolidation among automotive manufacturers. The Volvo financials used in the valuation are for illustration only— they include revenue and costs for all of the firm’s product lines. For purposes of exposition, we shall assume that Ford’s acquisition strategy with respect to Volvo was to acquire all of Volvo’s operations and later to divest all but the passenger car and possibly the truck operations. Note that synergy in this business case is determined by valuing projected cash flows generated by combining the Ford and Volvo businesses rather than by subtracting the standalone values for the Ford and Volvo passenger car operations from their combined value including the effects of synergy. This was done because of the difficulty in obtaining sufficient data on the Ford passenger car operations. Background By the late 1990s, excess global automotive production capacity totaled 20 million vehicles, and three-fourths of the auto manufacturers worldwide were losing money. Consumers continued to demand more technological innovations, while expecting to pay lower prices. Continuing mandates from regulators for new, cleaner engines and more safety measures added to manufacturing costs. With the cost of designing a new car estimated at $1.5 billion to $3 billion, companies were finding mergers and joint ventures an attractive means to distribute risk and maintain market share in this highly competitive environment. By acquiring Volvo, Ford hoped to expand its 10% worldwide market share with a broader line of near-luxury Volvo sedans and station wagons as well as to strengthen its presence in Europe. Ford saw Volvo as a means of improving its product weaknesses, expanding distribution channels, entering new markets, reducing development and vehicle production costs, and capturing premiums from niche markets. Volvo Cars is now part of Ford’s Premier Automotive Group, which also includes Aston Martin, Jaguar, and Lincoln. Between 1987 and 1998, Volvo posted operating profits amounting to 3.7% of sales. Excluding the passenger car group, operating margins would have been 5.3%. To stay competitive, Volvo would have to introduce a variety of new passenger cars over the next decade. Volvo viewed the capital expenditures required to develop new cars as overwhelming for a company its size. Historical and Projected Data The initial review of Volvo’s historical data suggests that cash flow is highly volatile. However, by removing nonrecurring events, it is apparent that Volvo’s cash flow is steadily trending downward from its high in 1997. Table 9-10 displays a common-sized, normalized income statement, balance sheet, and cash-flow statement for Volvo, including both the historical period from 1993 through 1999 and a forecast period from 2000 through 2004. Although Volvo has managed to stabilize its cost of goods sold as a percentage of net sales, operating expenses as a percentage of net revenue have escalated in recent years. Operating margins have been declining since 1996. To regain market share in the passenger car market, Volvo would have to increase substantially its capital outlays. The primary reason valuation cash flow turns negative by 2004 is the sharp increase in capital outlays during the forecast period. Ford’s acquisition of Volvo will enable volume discounts from vendors, reduced development costs as a result of platform sharing, access to wider distribution networks, and increased penetration in selected market niches because of the Volvo brand name. Savings from synergies are phased in slowly over time, and they will not be fully realized until 2004. There is no attempt to quantify the increased cash flow that might result from increased market penetration. Determining the Initial Offer Price Volvo’s estimated value on a standalone basis is $15 billion. The present value of anticipated synergy is $1.1 billion, suggesting that the purchase price for Volvo should lie within a range of $15 million to about $16 billion. Although potential synergies appear to be substantial, savings due to synergies will be phased in gradually between 2000 and 2004. The absence of other current bidders for the entire company and Volvo’s urgent need to fund future capital expenditures in the passenger car business enabled Ford to set the initial offer price at the lower end of the range. Thus, the initial offer price could be conservatively set at about $15.25 billion, reflecting only about one-fourth of the total potential synergy resulting from combining the two businesses. Other valuation methodologies tended to confirm this purchase price estimate. The market value of Volvo was $11.9 billion on January 29, 1999. To gain a controlling interest, Ford had to pay a premium to the market value on January 29, 1999. Applying the 26% premium Ford paid for Jaguar, the estimated purchase price including the premium is $15 billion, or $34 per share. This compares to $34.50 per share estimated by dividing the initial offer price of $15.25 billion by Volvo’s total common shares outstanding of 442 million. Determining the Appropriate Financing Structure Ford had $23 billion in cash and marketable securities on hand at the end of 1998 (Naughton, 1999). This amount of cash is well in excess of its normal cash operating requirements. The opportunity cost associated with this excess cash is equal to Ford’s cost of capital, which is estimated to be 11.5%—about three times the prevailing interest on short-term marketable securities at that time. By reinvesting some portion of these excess balances to acquire Volvo, Ford would be adding to shareholder value, because the expected return, including the effects of synergy, exceeds the cost of capital. Moreover, by using this excess cash, Ford also is making itself less attractive as a potential acquisition target. The acquisition is expected to increase Ford’s EPS. The loss of interest earnings on the excess cash balances would be more than offset by the addition of Volvo’s pretax earnings. Epilogue Seven months after the megamerger between Chrysler and Daimler-Benz in 1998, Ford Motor Company announced that it was acquiring only Volvo’s passenger-car operations. Ford acquired Volvo’s passenger car operations on March 29, 1999, for $6.45 billion. At $16,000 per production unit, Ford’s offer price was considered generous when compared with the $13,400 per vehicle that Daimler-Benz AG paid for Chrysler Corporation in 1998. The sale of the passenger car business allows Volvo to concentrate fully on its truck, bus, construction equipment, marine engine, and aerospace equipment businesses. (Note that the standalone value of Volvo in the case was estimated to be $15 billion. This included Volvo’s trucking operations.) -How was the initial offer price determined according to this case study? Do you find the logic underlying the initial offer price compelling? Explain your answer.

Using the M&A Valuation & Deal Structuring Model on the website accompanying this text and the data contained in the cells as a starting point, complete the following: a. What is the enterprise and equity value of Target on the Valuation Worksheet? b. Increase the sales growth rate by one percentage point (i.e., to 6.5%) on the Target Assumptions Worksheet. What is the impact on the Target's enterprise and equity values? (Hint: See Valuation Worksheet) Close model but do not save results.

Revenue-related synergy may result from the acquirer being able to sell their products to the target firm's customers.

Assume two firms have little geographic overlap in terms of sales and facilities. If they were to merge, how might this affect the potential for synergy?

In determining the initial offer price, the acquiring company must decide how much of anticipated synergy it is willing to share with the target firm's shareholders.