CFA CFA Level 2 Equity – M&A (Schweser Mock Exam 1 AM) – Stuck please help!

Equity – M&A (Schweser Mock Exam 1 AM) – Stuck please help!

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    • Alta12

      Can someone please explain why $90m (cash offer) is added to post acquisition price! Thanks!

      Fedora is interested in buying Ubuntu (one of Debian’s division).
      Fedora has offered to pay $90m cash to buy Ubuntu.

      Value of Ubuntu as a standalone business $78m
      Value of Ubuntu to Debian $85m
      Value of Fedora (5 million shares $10 par)
      Value of Fedora and Ubuntu combined (post acquistion) $135m

      Alternatively, Fedora is prepared to offer to buy Ubuntu by directly issuing to the shareholders of Debian a total of 3m $1 par value shares that will rank equally with existing shares.

      If Debian shareholders accept the stock offer by Fedora, the economic impact on them would be closest to = -$625,000.

      Workings: Value of shares post acquisition price = [$135m + $90m/8m] x 3m = $84,375,000
      Gain to Debian Shareholders = $84.375m – $85m = – $625,000

    • Zee Tan

      Hi @Alta12

      I’m assuming the formula is [$125m + $90m] / 8m x 3m = $84,375,000. This is a comparison of the cash route vs the shares route. The lead-up to that formula is something like this:

      Total value of F + U following Cash Route = Total value of F + U following Shares Route
      $135m + $90m = [Value of 1 share post acquisition price] x 8m shares
      Value of 1 share post acquisition price = [$135m + $90m] / 8m

      Value of total shares to Debian shareholders = Value of 1 share post acquisition price x 3m
      = [$135m + $90m] / 8m x 3m
      = $84,375,000

      We then need to compare this calculated value to the actual value of Ubuntu to Debian, hence

      Gain to Debian Shareholders = $84.375m – $85m
      = – $625,000

      Hope that helps! 🙂

    • vincentt

      @Alta12 i did that one last week so I could still remember that question.

      Basically the formula is this:

      Value of both merged firms are = acquirer (pre) + target (pre) + synergies – cash paid

      $135m = $132 + $85 + synergies – $90m

      What’s in the first post above was –> Value of Fedora (pre-acquisition) $132

      so, if you work out the above formula the synergies would be $8m.

      Now that you are paying via stock, so you have to add $90m back to $135m (as this figure includes cash payment).

      Hope that helps but let me know if you want further explanation.

    • niravjoshi1988


      One doubt about this question. Did anyone notice that previously outstanding shares had par value of $10 and newly issued shares has par value of $1. Still we are using total 8 mn as number of shares outstanding.

      Should not difference of par value have any impact here?

      Might be a dumb question……

    • Sophie Macon

      @niravjoshi1988 – good question.

      Par value (for shares) is somewhat an arbitrary concept mainly for legal and accounting purposes. In short, it is the face value (or nominal value) of shares at issuance, which is usually a low number. It doesn’t reflect market value, but simply done to represent the minimum value of a share that a company cannot issue below at.

      So in this case par value is put there to confuse you 🙂

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