Birdie Golf inc has been in merger tlaks with hybrid golf company for the past six months. After serveral rounds of negotiations, the offer under discussion is a cash offer of $250 million for hybrid 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 administration expenses. Bryce Bichon, the financial officer for Birdie has been instrumental in the merger negotiations. Bryce has prepared the following pro forma statements for Hybrid golf assuming the merger takes place. The financial statements include all synergistic benefits from the merger. Sales 2016 2017 2018 2019 2020
production costs 380,000,000 405,000,000 450,000,000 508500000 562500000
-other expenses 248,00,000 284,000,000 315,000,000 355,500,000 393,000,000
-depreciation 33,000,000 41,000,000 45,000,000 51,000,000 56,000,000
=ebit 43,000,000 44,000,000 53,000,000 64,000,000 75,500,000
-interest 8,500,000 10,000,000 11,000,000 11,250,000 12,500,000
taxable income 34,500,000 34,000,000 42,000,000 52,750,000 63,000,000
-taxes (40%) 13,800,000 13,600,000 16,800,000 21,100,000 25,200,000
=net income 20,700,000 20,400,000 25,200,000 31,650,000 37,800,000
additions toretained earnings 0 15,400,000 11,700,000 11,700,000 10,800,000
If birdie golf buys hybrid golf, an immediate divided of 67.5 million would be paid from hybrid golf to birdie. Stock in birdie golf currently sells for 87 per share, and the company has 18 million shares of stock outstanding. hybrid golf has 8 million shares of stock oustanding. Both companies can borrow at an 8 percent interest rate. Bryce believes the current cost of capital for birdie golf is 11%. the cost of capital for hybrid golf is 12.4 % and the cost of equity is 16.9%. in five years, the value of hybrid golf is expected to 270 million.
Bryce has asked you to analyze financial aspects of the potential merger with these questions
1. Suppose hybrid shareholders will agree to a merger price of 31.25 per share. Should Birdie proceed with the merger?
2. What is the highest price per share that birdie should be willing to pay for hybrid?
3. Suppose birdie 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 31.25 per share?
4. What is the highest exchange ratio birdie should be willing to pay and still undertake the merger?