Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $1 billion, corresponding to extra earnings of $0.05 billion per year.
A 70% scrip and 30% cash offer will be made that pays the fair price for the target's shares plus $0.4 billion of the available synergies, corresponding to extra earnings of $0.02 billion per year. The cash will be paid out of the firm's existing cash holdings, so no new debt or equity will be raised.
| Firms Involved in the Takeover | |||
| Acquirer | Target | Merged | |
| Assets ($b) | 12 | 5 | ? |
| Debt ($b) | 7 | 2 | (a) |
| Equity ($b) | 5 | 3 | ? |
| Share price ($/share) | 10 | 2 | (b) |
| Number of shares (b) | 0.5 | 1.5 | (c) |
| Earnings ($b/year) | 0.25 | 0.15 | (d) |
| EPS ($/share) | 0.5 | 0.1 | ? |
| PE ratio (years) | 20 | 20 | ? |
Assume that:
- The acquirer's cash holdings are in a liquid account paying zero interest;
- The cash will be paid out of the firm's cash holdings, so no new debt or equity will be raised;
- There are no transaction costs or fees;
- The firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant;
- The acquisition is planned to occur immediately, so ignore the time value of money.
Which of the following statements is NOT correct? The merged firm will have: