Corporate - Mergers - Restructuring

QUESTION 1

1.       Which of the following statement about value of control is true?

	a.	The value of control is greater for a well-managed firm than for a poorly managed one.
	b.	The value of control should accrue to acquirer shareholders because the current management is not running the firm optimally.
	c.	The value of control increases with the management skills of the acquirer firm.
	d.	The value of control is part of value of synergy.

QUESTION 2

1.       Corox is a chemical manufacturing company, planning to acquire a competing firm Grad. The analyst has estimated that Corox's standalone value is $562 million, and Grad's standalone value is $312. The analyst also thinks that Grad is not performing at par with industry peers due to poor management. With a new management team and appropriate restructuring, Grad's value is estimated to be able to increase by $50 million. Finally, the analyst estimates the value of the two companies after acquisition to be $1.2 billion, assuming Corox has successfully restructured Grad. Based on these estimates, what should be the analyst's estimated value of synergy between Corox and Grad?

	a.	$276 million
	b.	$326 million
	c.	$50 million
	d.	Not enough information

QUESTION 3

1.       Sanyon is considering the acquisition of Bacer in a share for share transaction in which the acquirer would pay $40 for each share of target's common stock. Right now, Sanyon's stock price is $50, and the target share price is $25. What should be the exchange ratio?

	a.	0.8
	b.	0.5
	c.	1.25
	d.	2

QUESTION 4

1.       Follow up question 4, based on your own estimates, the exchange ratio should be 0.6. Assume that 0.6 is the fair ratio, but Sanyon goes forward with their offer (as in question 3). Which of the following will happen to the shareholders of the two companies if the acquisition is complete?

	a.	There is wealth transfer from acquirer shareholders to target shareholders.
	b.	There is wealth transfer from target shareholders to acquirer shareholders.
	c.	There is no wealth transfer between acquirer and target shareholders.
	d.	More information is needed.

QUESTION 5

1.       If the sources of synergy is economy of scale in COGs, which of the following statements is true?

	a.	Combined firms' sales should be bigger than the sum of the two firms' sales.
	b.	Combined firms' sales growth rate should be higher than the weighted average of the two firms' sales growth rate.
	c.	Combined firms' COGs should be bigger than the weighted average of the two firms' COGs.
	d.	Combined firms' profit margin should be higher than the weighted average of the two firms' profit margin.

QUESTION 6

1.       The split of synergy between the target firm and the acquirer depends on the relative negotiation power between the two. Which of the following will tilt the negotiation power towards the target, leading to a higher offer premium?

	a.	Target firm is located in Ireland whose marginal tax rate is 15% lower than acquiring firms' effective tax rate in the US.
	b.	Parent company of the target firm is financially distressed and is in dire need for cash.
	c.	Acquiring firm has unique expertise on zero-based budgeting, and is expected to achieve cost savings in the target company after the acquisition is complete.
	d.	Target company's founder passed away and his grown-up children have no interest in managing the company and want to sell.

QUESTION 7

1.       (Questions 7-9 are based on the following information.)

American Health Care, a pharmaceutical firm, announces that it will be acquiring Healthcare Associates, a hospital management firm. The following table summarizes the expected cash flows to the firm at each of these firms, run independently, and the expected cash flows from the combined firm with synergy benefits. The cost of capital for both firms, run independently, is 10%; the combined firm will have the same cost of capital. The expected growth rate in the cash flows after year 2 is 5%, for the firms run independently. And the combined firm is expected to be able to grow faster at 5.5% after year 2.

Expected Cash Flows
Company	FCF1	FCF2	Growth Rate after Year 2
AHP	100	120	5%
HA	60	69	5%
Combined (with Synergy)	172	203	5.5%

Question 7. Estimate the value of the combined firm with synergy.

	a.	5083.35
	b.	4257.37
	c.	3899.81
	d.	3581.81

QUESTION 8

1.       (See Question 7. for background information.)

Estimate the value of synergy.

	a.	675.56
	b.	616.18
	c.	1501.54
	d.	812.70

QUESTION 9

1.       (See Question 7. for background information.)

Assume that Healthcare Associates was fairly valued before the acquisition. American Health Products had 100 million shares outstanding at $22.83 per share, before the acquisition. If American Health Products paid a premium (over the market price) of $800 million for Healthcare Associates, what would you expect will happen to American Health Product's stock price on the announcement?

	a.	Increase because of the expected synergy benefits
	b.	Decrease because the AHP overpaid for HA
	c.	Increase because AHP pays less than they gain from synergy benefits
	d.	Not enough information

 

 

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