Solved: For each of the following scenarios estimate how

much value

For each of the following scenarios, estimate how much value an acquisition will create, how
much of that value will be appropriated by each of the bidding firms, and how much of that value
will be appropriated by each of the target firms. In each of these scenarios, assume that firms
do not face significant capital constraints.
a. A bidding firm, A, is worth $27,000 as a stand-alone entity. A target firm, B, is worth $12,000
as a stand-alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other
firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by
these other firms. If A acquired B, would this acquisition create value? If yes, how much? How
much of this value would the equity holders of A receive? How much would the equity holders of
B receive?
b. The same scenario as in a, except that the value of B if it is acquired by the other firms
interested in it is only $12,000.
c. The same scenario as in a, except that the value of B if it is acquired by the other firms
interested in it is $16,000.
d. The same scenario as in b, except that Firm B contacts several other firms and explains to
them how they can create the same value with Firm B that Firm A does.
e. The same scenario as in b, except that Firm B sues Firm A. After suing Firm A, Firm B installs
a “supermajority” rule in how its board of directors operates. After putting this new rule in place,
Firm B offers to buy back any stock purchased by Firm A for 20% above the current market
price.

ANSWER
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