Box plc is considering the acquisition of Circle plc. The former is valued at £1

Question

Box plc is considering the acquisition of Circle plc. The former is valued at £100m and the latter at £50m by the market.
Economies of scale will result in savings of £2.5m annually in perpetuity. The required rate of return on both firms and the combination is 11 per cent.
The transaction costs will amount to £1m.

A. What is the present value of the gain form the merger?

B. If a cash offer of £70m is accepted by Circle's shareholders what is the value created for Box's shareholders?

C. If shares are offered in such a way that Circle's shareholders would possess one-third of the merged entity, what is the value created for Box's shareholders?

Explanation / Answer

A)

Combined value of firm: 100m + 50m = 150m

Add: synergy = 22.727 m
Less :bid-pref = 0
Less: transfer costs = (1) m
Value of combined firm = 171.727 m

B)

Cash offer accped for C = 70m

Bid = 70-50 = £20m premium
Value G = 150m + 21.7272m

C)

Cirle shares hold 1/3 of B

then Box's share hold 2/3 (remaining)

Value B = 2/3 (100+50+21.7272) = 114

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