Finance- Mergers & Acquisitions
Dipsy Sauces & Gravies Industries has negotiated the acquisition of Doodle Pasta Corporation with a new name of Dipsy Doodle Noodle Company. Under the terms of the merger, Doodle stockholders will receive .7 shares of Dipsy for each of their old shares. The pre-merger data for the two firms is:
|
|
Dipsy
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Doodle
|
|
Sales
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$500,000,000
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$160,000,000
|
|
Net Incom
|
25,000,000
|
14,000,000
|
|
Common shares outstanding
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8,550,000
|
15,000,000
|
|
Stock Price
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$97.25
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$18.00
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1. Based on the original shares, what is Dipsy's EPS?
2. Based on the original shares, what is Doodle's EPS (What is the effective EPS that Doodle stockholders receive?)?
3. What are the post-merger earnings per share?
4. What is the maximum number of new shares that must be issued to Doodle stockholders?
5. If Dipsy decides to pay $30 per share for Doodle, what would be the exchange ratio?
6. Based on the $30 per share purchase, how many new shares of Dipsy stock would need to be issued?
7. Based on the $30 per share purchase, what would be the new EPS for the new merged company?
Peaches & Cream Ice Cream Factory is trying to acquire Diet Delight Weight Management Studios. Diet has a tax loss carryforward of $3 million. Diet can be acquired for $2.4 million. Diet has liquidatable assets of $1.5 million. Peaches estimates that its EBT in the 5 years after the merger would be as shown on the next page:
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YEAR
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Earnings Before Taxes
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|
1
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$450
|
|
2
|
$800
|
|
3
|
$850
|
|
4
|
$800
|
|
5
|
$800
|
The expected earnings given are assumed to fall within the annual limit that is legally allowed for the application of the tax loss carryforward. Peaches is in the 40% tax bracket. The firm has a cost of capital of 12%.
8. What would be Peaches' tax liability for the 1st year without the merger?
9. What would be Peaches' tax liability for the 4th year with the merger?
10. What would be the highest value for Diet based only on the cumulative tax savings?
11. What would be the most Peaches should be expected to pay for Diet based only on the present value of the tax savings?
12. Based on the asking price of Diet, what should be the most you, as CFO, would pay for Diet?