Two firms are competing to acquire Sanctuary Ltd, a firm with 20 million shares outstanding that are currently trading at $20. Underground Excavators (UE) has a market share of $1 million and 100 million shares outstanding, while Gnosis Inc. has 500 million shares trading at $15. UE has offered to pay $600 million cash for the firm while Gnosis has offered to issue 40 million new shares as a payment.
A) Assuming synergies are perpetual and the discount rate is 10% for both companies, what is the minimum yearly synergy benefit created by the merger that would justify each offer?
B) If synergies from the merger are expected to be $20 million in perpetuity for both UE and Gnosis in a no-tax environment, which offer are Sanctuary’s shareholders most likely to accept and why?
C) If Sanctuary’s shareholders believe that a merger with either bidder would create perpetual yearly synergies of $35 million, would this affect the evaluation of each alternative in part b? What underlies how the shareholders will choose between the offers?
D) Assuming an efficient market, if Sanctuary’s shareholders accept Gnosis’ offer, what should happen to the share price of Sanctuary AND Gnosis immediately after the announcement that the offer was accepted? Consider both cases: synergies of $20 million and $35 million for both firms- a total of 4 prices should be reported.