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Mergers & Acquisition Problem Set Essays

Question 4 (25 marks)
Golden Golf Inc. has been in merger talks with Birdie Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer RM550 million for Birdie Golf. Both companies have niche markets in the golf club industry, and both believe that a merger will result in synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses. Bryce Bichon, the financial officer for Golden, has been instrument in the merger negotiations. Bryce has prepared the following pro forma financial statements for Birdie Golf assuming the merger takes place. The financial statements include all synergistic benefits from the merger.
2010 (RM’000)
2011 (RM’000)
2012 (RM’000)
2013 (RM‘000)
2014 (RM’000)
Sales
800,000
900,000
1,000,000
1,125,000
1,250,000
Production Costs
562,000
630,000
700,000
790,000
875,000
Depreciation
75,000
80,000
82,000
83,000
83,000
Other Expenses
80,000
90,000
100,000
113,000
125,000
EBIT
83,000
100,000
118,000
139,000
167,000
Interest
19,000
22,000
24,000
25,000
27,000
Taxable Income
64,000
78,000
94,000
114,000
140,000
Taxes (40%)
25,600
31,200
37,600
45,600
56,000
Net Income
38,400
46,800
56,400
68,400
84,000
Additions to RE
0
34,000
27,000
27,000
25,000
If Golden Golf buys Birdie Golf, and immediate dividend of RM150 million would be paid from Birdie Golf to Golden. Stock in Golden Golf currently sales for RM94 per share, and the company has 18 million shares of stock outstanding. Birdie Golf has 8 million shares of stock outstanding. Both companies can borrow at an 8% interest rate. Bryce believes the current cost of capital for Golden Golf is 11%, and the cost of capital for Birdie Golf is 16.9%. In five years, the value of Birdie Golf is expected to be RM600 million.
Bryce has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions.
Questions:
1. Suppose Birdie shareholders will agree to a merger price of RM68.75 per share. Should Golden proceed with the merger?(9 marks)
2. What is the highest price per share that Golden should be willing to pay for Birdie?(4 marks)
3. Suppose Golden is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of RM68.75 per share?(4 marks)
4. What is the highest exchange ratio Golden should be willing to pay and still undertake the merger?(3 marks)
5. Advise Golden with the merger. (5 marks)

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