MGFC10H3 (Intermediate Finance)
Review Problems with solutions on Mergers & Acquisitions
Prof. Syed W. Ahmed
Andrea Chubb & Neil Garcia Limited (ACNGL) is considering acquiring Updeshz Chahl & Anthony Lam
Industries (UCALI). The following information is available about the two companies:
Price $90 $53
Number of Shares 500,000 100,000
Earnings $3,000,000 $500,000
The most recent dividend paid by UCALI was $4 per share and it is expected that dividends and earnings at
UCALI will grow at 6% per year. However after the acquisition due to several economies of scale growth rate
at UCALI will increase to 8% per year.
a. What is the value of UCALI to ACNGL?
b. If ACNGL offers $60 in cash for each share of UCALI then what would the NPV of the acquisition be?
c. If ACNGL offers 67,000 of its shares in exchange for UCALI outstanding shares, then what would the NPV
of the acquisition be?
d. Should the acquisition be attempted, and, if so, should it be a cash or stock offer?
e. To make the value of stock offer equivalent to the cash offer, how many of its share ACNGL offer in
exchange of 100,000 shares of UCALI.
Alex Szeto & Kuraish Zoeb Pools (AKP) and Alan Luc & Virginia Chan Pools (AVP) have agreed to merge
and form Marina Mironenko & Debbie Ma Pools Limited (MDL). The companies are exactly alike except for
location. AKP is located in Toronto, and AVP is in Edmonton. The end of period value of each firm is
determined by the weather, as shown.
Weather Probability Value
Hot 0.2 $5,000,000
Warm 0.5 $4,000,000
Rainy 0.3 $1,000,000
Each company has an outstanding debt claim of $2,000,000. Assume that no premiums are paid in the merger.
a. What is the probability distribution of the value of the combined firm after the merger?
b. What is the probability distribution of the end of period debt values and stock values after the merger?
c. Show that the value of the combined firm is the sum of the individual values.
d. Show that the bondholders are better off and the shareholders are worse off in the combined firm than they
would have been if the firms remain separate.