Problem
Getaway Ltd. and Funtastic Ltd. both operate in the fast growing business of budget accommodation. They are both all-equity firms and have market values (as stand-alone firms) of $400 million and $150 million, respectively. The Board of Getaway believe that merging with Funtastic will bring in a synergy of $80 million. The Board of Funtastic have indicated that they are willing to sell the firm for $200 million in cash.
Task
1. Calculate the value of Getaway after the merger if it pays $200 million in cash.
2. Calculate the NPV of the merger to Getaway.
3. If investors estimate a probability of 60% that the merger will take place, calculate the market value of Getaway after it makes the offer but before the merger is completed.
4. Calculate the NPV of the merger to Getaway if the market value obtained from part (3) is used.