E-III Corp. is investigating the possible acquisition of Silicon Inc. Assume that both firms have no debt outstanding.
E-III Corp. Silicon Inc.
Pre-announcement stock price $15.00 $12.00
Number of shares outstanding 8 million 6 million
Synergy from the acquisition is estimated to be $22 million. Both firms agree that Silicon Inc. will be acquired for $13.50 per share. They are negotiating methods of payment: an all-cash offer, a stock exchange offer, as well as the combination of cash and stock exchange offer ($7.5 cash per share of Silicon plus 0.4 shares of E-III per share of Silicon). Calculate value of a merged company, the gains (losses) to each group of shareholders, NPV of a deal under various payment methods. Synergy remains the same regardless of payment method.