Example of TakeOver - calculating benifits

Market Cap of OXR: 3.8billion
Market Cap of AGC: 382million
Say 2 million $ saving with merger with a discount rate of 10%



(a) The synergy gain is the present value of all cost savings which is equal to $2,000,000/.10 = $20,000,000.

(b)

PVAB = 4,202,000,000 (3,800,000,000 + 3,800,000 + 20,000,000)

PVA = 3,800,000,000

PVB=382,000,000

Firm A should do the acquisition as long as the NPV is non-negative. This will hold when:

(4,202,000,000 – 3,800,000,000 – Cash payment) ≥ 0

402,000,000 ≥ Cash payment

Thus, the most OXR should be willing to pay for AGC is $402 million (given a saving per year of $2million and discount rate of 10%.)