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Acquisition & Merger Analysis

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Please use the attached Excel file templates by Alfred Rappaport for the analysis:

OldPro Corp. is a firm with $100 million of sale in a mature industry that is very competitive. The firm is considering the acquisition of FastGrow Inc., a firm with patents in a new technology related to OldPro's market segments. OldPro believes that there would be considerable synergies from the merger.

Keep in mind that no shareholder value can be created beyond a ten-year horizon
Here are key value drivers for the two companies, apart and merged.

Driver OldPro-alone FastGrow-alone Merged

Base sales ($ '000) $100,000 $10,000 $110,000
Sales growth rate 8% 25 % 13 %
Operating profit margin 4 25 % 15 %
Fixed + work. capital inv. rate 15 % 25 % 20 %
Cash tax rate 40 % 35 % 36 %
Cost of capital 8 % 17 % 11 %
Market securities ($ '000) $15,000 $500 $6,000
Debt ($ '000) $35,000 $2,000 $50,000
Shares outstanding ('000) 5,000 1,000 6,500

a. What are the valuations of OldPro Corp. and FastGro Inc. as standalone firms based on the SVA Model?
b. What is the estimated value of the merged firm?
c. What is the estimated value created by the merger?
d. What is the maximum acceptable purchase price?
e. What is the value created for the buyer(OldPro Corp.) if the purchase is 60 million?
f. If OldPro Corp has to pay a 40% premium over the standalone value of FastGrow for the acquisition to go forward, would you recommend this merger?

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The solution performs an acquisition and merger analysis for Alfred Rappaport.

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