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Rob's e2700 Notes

🔎 Calculating Market Cap/Share Price with Both Synergies and a Premium

❔ In your office hours section of Friday, April 29 e2700 Notes, ‘Acquisition with premium’, the 30% premium is added to Beenaround’s market cap ($130M = $100M+ $30M premium), which requires additional shares to offer in exchange.

If I am to calculate the share price of Beenaroundafter acquisition and with the premium, would I use the original share price of $50 or $65 per share ($50+ 30%) in my calculations?

In other words, do I assume that the premium applies to both market cap and share price of the target, or justthe premium on the market cap to calculate the required additional shares?

✔You will need to go through the full process that we went through earlier, here: Core example for this week

  1. Calculating the market cap of the combined company (=A+T+S)
  2. Calculate the total number of shares in the company based any premium being offered
  3. Divide market cap by number of shares to get the share price

In greater detail:

1.) Estimate the market cap of combined company = MCC = A + T + S
A is market cap of acquirer, T is market cap of Target,
S is the monetary value of any synergies.

2.) The number of new shares to issue = x = T*(1+prem)/PA
Exchange ratio = x/NT

3.) Estimate of the new share price = MCC/NC
PC = (the # from step 1) / (NA + x)

Examples of each step can be found at the bottom of the following page under the headings, “Synergies” and “Premium and Synergies”.

They are reproduced below for your convenience, but you will want to watch the recording from Friday to get more information about how the calculations are done.

Beenaround has 2 million shares that are currently outstanding, priced at $50 per share. The second company, Movenin Corporation, is a young company with much more lucrative growth opportunities. Consequently, it has a higher value: Although it has the same number of shares outstanding, its stock price is $80 per share. Assume Movenin acquires Beenaround using its own stock, and the takeover adds no value. In a perfect market, what is the value of Movenin after the acquisition? At current market prices, how many shares must Movenin offer to Beenaround’s shareholders in exchange for their shares?

Acquisition with synergies

Now, suppose there were $10M of synergies…

After the announcement, the share price of Movenin would immediately rise to the share price of the combined company, because each share in movenin would become a share in the combined company:

PNew=A+T+SNA+x=$160M+$100M+$10M2M+1.25=$83.08P_{New} = \frac{A + T + S}{N_A + x} = \frac{\$160M + \$100M +\$10M}{2M + 1.25} = \$83.08

Movenin’s shares will rise from $80 to $83.08.

Likewise, the share price of Beenaround will be determined by the merger. Each share of Beenaround will be replaced with .625 shares of the combined company. Therefore, each Beenaround share is worth

PB= .625*$83.08=$51.93

Beenaround’s shares will rise from $50 to $51.93.

Acquisition with premium

Suppose that Movenin offers a 30% premium. How many shares would it need to offer?

Beenaround is worth T = $100M, so with a 30% premium, you have to pay 30%*100M =30M extra, or $130M=$100M*1.3.

Therefore, you will need to offer 30% more shares: You need to pay them $130M/$80 = 130/80=1.625M

Previously, we offered them 1.25 M shares.

(1.625-1.25)/1.25 = 0.3