Overview
It is now the end of 2024. ABC Corporation considers acquiring XYZ Corporation, whose financial statement is given below. It plans to implement some improvements in this company after the acquisition. If the deal is concluded shortly, the improvements can be implemented by the end of the first year.
1) XYZ's annual sales (revenue) growth has been 3%, below the industry average. ABC plans to raise XYZ's sales growth rate to the current industry level of 5%.
XYX has been inefficient. ABC plans that its CGS and SG&A as % of sales will be lowered by 6 percent points (e.g., 70% → 64%) for CGS and 3 percent points.
Capital market data:
XYZ's current stock price is $50. It has 700,000 shares.
XYZ's bond yield is 5%.
The stock B: xYz = 1.7.
Information about ABC:
PABC: $10. Number of shares: 20 million. EPS: $1, expected to grow at 6% in the next 5 years.
BaBc = 2.0. Debt: $40 million; its credit quality is the same as of XYZ's.
Market information: The Treasury rate is 4%. The market risk premium is 6%.
Q1) What is the maximum price that ABC should offer for each share of XYZ, which would not dilute its own value?
2) If ABC makes a stock exchange offer and cares about its EPS, what is the maximum exchange ratio that it can offer without diluting its expected EPS for 2025? (Assume for simplicity no change in XYZ's debt.)
Then, what is the maximum value of the offer that ABC can make?
Financial statement, XYZ corp. | 2024 |
Income statement | |
Revenue | 55 |
Cost of goods sold (CGS) | 38 |
Selling, General & Admin. Exp | 11 |
Depreciation | 2.5 |
Interest | 1 |
Income before taxes | 2.5 |
Taxes | 0.7 |
Net income | 1.8 |
Balance sheet | |
Assets | |
Cash | 1 |
Accounts receivable | 12 |
Inventory | 20 |
Current assets | 33 |
Net plant & equipment | 20 |
Total assets | 53 |
Liability and Net Worth | |
Accounts payable | 8 |
Long term debt due | 3 |
Current liabilities | 11 |
Long term debt | 15 |
Stockholders equity | 27 |
Total liabilities | 53 |