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Left Shoe Corp has 10 million shares outstanding, each trading at $20 per share
Left Shoe Corp has 10 million shares outstanding, each trading at $20 per share. RightShoe Corp. has 5 million shares outstanding, each trading at $40 per share. LeftShoe wants to acquire RightShoe. The acquisition will result in net synergies of $100 million. Assume that the pre-merger share prices reflect standalone values (that is, investors didn’t anticipate acquisition). Suppose LeftShoe announces a cash offer to acquire RightShoe by paying a 30% premium to RightShoe’s pre-merger price. What is the NPV of the trans- action to LeftShoe and what is the NPV of the transaction to RightShoe? What are the two share prices immediately after the announcement?
Expert Solution
| LeftShoe Corp. | RightShoe Corp(Target Co) | |
| Number of shares outstanding | 10 Million | 5 million |
| Market price per share | $20 | $40 |
|
Pre-merger market value [Number of shares O/S * Market price per share] |
$200 Million | $200 Million |
Cash per share to be paid by LeftShoe to the shareholders of RightShoe = $40+[$40*30%] = $52 per share
Total cash to be paid to acquire RightShoe = $52 Per share * 5 Million share = $260 Million
Net synergies from Merger=$100 Million
NPV of the merger transaction to the Leftshoe = Premerger market value of the target company + Synergies from merger- Amount paid to the target company
=>NPV of the merger transaction to the Leftshoe = $200 Million+$100 Million-$260 Million
=>NPV of the merger transaction to the Leftshoe =$40 Million
NPV of the transaction to RightShoe= Cash received from the Acquirer company- Premerger market value of the company
=>NPV of the transaction to RightShoe= $260 Million - $200 Million
=>NPV of the transaction to RightShoe= $60 Million
Market value of Leftshoe after merger = Premerger market value+ Premerger market value of the target company + Synergies from merger- Amount paid to the target company
=>Market value of Leftshoe after merger =$200 Million + $200 Million+$100 Million-$260 Million
=>Market value of Leftshoe after merger =$240 Million
Market price per share of Leftshoe after merger announcement = Market value of Leftshoe after merger / Number of shares outstanding
=>Market price per share of Leftshoe after merger announcement = $240 Million / 10 Million share
=>Market price per share of Leftshoe after merger announcement = $24 per share
Market price per share of RightShoe after merger announcement = Amount to be received from the Acquires / Number of shares outstanding
=>Market price per share of RightShoe after merger announcement =$260 Million / 5Million share
=>Market price per share of RightShoe after merger announcement =$52 Per share
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