Exercise 4 [8 Points] Company A is planning to acquire Company B. After the acqu

Question

Exercise 4 [8 Points]
Company A is planning to acquire Company B. After the acquisition there
will be an estimated cost saving for the merged company of $80 million. At
the moment company A's shares trade for $200 and there are 1,000,000 shares
outstanding. Company B's shares trade for 114 each and there are 2,000,000
shares outstanding. The boards of directors of the two companies agree to
share the savings equally between the shareholders of the two companies. The
acquisition will be paid with shares of company A, and A is planning to issue
2,000,000 new shares.
How many shares of company A will B's shareholders receive after the ac-
quisition?

Explanation / Answer

Current market Value of A's shares = $ 200 x 1 million = $ 200 million

Current market Value of B's shares = $ 114 x 2 million = $ 228 million

After acquisition:

After issue of new shares, total number of shares of A = 1 million + 2 million = total 3 million

So, A will pay 3 million shares to acquire 2 million shares of B.

So it will be a 3 for 2 share payment.

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