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Expected Gain from Acquisition

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Hampshire-Cathaway (H-C), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Trilennium Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at H-C has produced the following table of relevant data:

Hampshire-Cathaway Trilennium
Earnings per share $3.00 $2.00
Dividend per share $3.00 $0.80
Number of shares 200 million 10 million
Stock price $30 $20

H-C's analysts estimate that investors currently expect growth of about 6% per year in Trilennium's earnings and dividends. They assume that with the improvements in management that H-C could bring to Trilennium, its growth rate would be 10% per year with no additional investment outlays beyond those already expected.

a. What is the expected gain from the acquisition?
b. What is the NPV of the acquisition to H-C shareholders if it costs an average of $30 per share to acquire all of the outstanding shares?
c. Would it matter to H-C's shareholders whether the shares of Trilennium stock are acquired by paying cash or H-C stock?

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Solution Preview

a) First calculate the required rate of return on Trilennium r=D1/P0+g=0.80*(1+6%)/20+6%=10.24%
Now calculate the value of stock assuming the growth rate of 10% per annum = D0*(1+g)/(r-g)
=0.80*(1+10%)/(10.24%-10%)=$366.67
Expected gains from the acquisition = ($366.67-$20)*10 ...

Solution Summary

The expected gain from acquisition is determined. The NPV of the acquisition to H-C shareholders if it costs an average of $30 per share to acquire all of the outstanding shares is determined.

$2.19
See Also This Related BrainMass Solution

Merger Gains and Costs are demonstrated.

Merger Gains and Costs. As treasurer of Leisure Products, Inc., you are investigating the possible
acquisition of Plastitoys. You have the following basic data:

Leisure Products Plastitoys
Forecast earnings per share $5 $1.50
Forecast dividend per share $3 $0.80
Number of shares $1,000,000 $600,000
Stock price $90 $20

You estimate that investors currently expect a steady growth of about 6 percent in Plastitoys's earnings and dividends. You believe that Leisure Products could increase Plastitoys's growth rate to 8 percent per year, without any additional capital investment required.

a.What is the gain from the acquisition?

b. What is the cost of the acquisition if Leisure Products pays $25 in cash for each share of Plastitoys?

c. What is the cost of the acquisition if Leisure Products offers one share of Leisure Products for every three shares of Plastitoys?

d. How would the cost of the cash offer and the share offer alter if the expected growth rate of Plastitoys were not increased by the merger?

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