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Flannery and Stultz buyout offer: EPS, PE after the merger; value of synergy

The shareholder of Flannery Company has voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:
Flannery Stultz
Price-Earnings Ratio 5.25 21
Shares Outstanding 60,000 180,000
Earnings $300,000 $675,000

Flannery's shareholders will receive one share of Stultz for every three shares they hold in Flannery.

a. What will the EPS of Stultz be after the merger? What will be the PE ratio be if the NPV of the acquisition is zero?

b. What must Stultz feel is the value of synergy between these two firms? Explain how your answer can be reconciled with the decision to ahead with the takeover.


Solution Preview

a. EPS after merger = Earnings of merged entity / Number of shares outstanding for the merged entity
Earnings of merged entity = (Earnings of Flannery + Earnings of Stultz) = $300,000 + $675000=$975,000
Number of new shares of Stulz issued to the shareholder's of Flannery = 60000/3=20000
Outstanding shares of merged entity ...

Solution Summary

The solution examines Flannery and Stults buyout offer. The EPS and PE after the merger is determined as well as the value of synergy.