{"id":16268,"date":"2021-06-14T13:49:14","date_gmt":"2021-06-14T13:49:14","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=16268"},"modified":"2026-01-06T20:41:35","modified_gmt":"2026-01-06T20:41:35","slug":"bid-evaluation","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/corporate-finance-cfa-level-2\/bid-evaluation\/","title":{"rendered":"Estimated Post-Acquisition Value"},"content":{"rendered":"\r\n<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Estimating the premium gain for a target in a merger\",\r\n    \"text\": \"Joe Blake, an investment banker, is part of a team tasked with estimating cash offers presented to their client, McDowell Software Inc., in an ongoing acquisition deal between McClurkin Ltd. Both companies agreed on a transaction value of about $13 per share of McDowell\u2019s stock. Blake estimates that the combined company will result in economies of scale worth $70 million. Blake compiled the following data.\\n\\nMcClurkin\\nMcDowell\\nPre-merger stock price: $16 $11\\nNumber of shares outstanding (millions): 70 28\\nPre-merger market value (millions): $1,120 $308\\n\\nThe premium gain the target will get because of the merger is closest to:\\n\\nA. $56 million.\\n\\nB. $364 million.\\n\\nC. $14 million.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"A. $56 million.\\n\\nTo calculate the premium gain, first determine the price paid for the target:\\n\\nP_T = 28 million \u00d7 $13 = $364 million\\n\\nNext, calculate McDowell\u2019s gain (Takeover premium):\\n\\nTakeover Premium = $364 million \u2212 $308 million = $56 million\\n\\nB is incorrect because $364 million is the price paid for McDowell, not the premium.\\n\\nC is incorrect because $14 million is the acquirer\u2019s gain after considering economies of scale.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/XBra1Jp5JAU\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>In a merger and acquisition transaction, the acquirer will always want to get the best possible price for the target, while the target will always want to sell at a higher price. As such, the acquirer usually pays a premium to convince shareholders to give up control over the company.<\/p>\r\n<p>$$\\text{Target shareholder&#8217;s gain}=\\text{Premium}=\\text{P}_{\\text{T}}-\\text{V}_{\\text{T}}$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(\\text{P}_{\\text{T}}=\\) Price paid for the target company.<\/p>\r\n<p>\\(\\text{V}_{\\text{T}}=\\) Pre-merger value of the target company.<\/p>\r\n<p>The acquirer anticipates that the premium paid for the target will translate to gains derived from synergies increasing the value of the acquiring company.<\/p>\r\n<p>$$\\text{Acquirer&#8217;s gain}=\\text{Synergies}-\\text{Premium}=\\text{S}-(\\text{P}_{\\text{T}}-\\text{V}_{\\text{T}})$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(S\\) = Synergies created by the business combination<\/p>\r\n<p>The post-merger value of the company is:<\/p>\r\n<p>$$V_A\u2217=V_{A}+V_{T}+S-C$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(V_A\u2217=\\) Post-merger value of the combined companies<\/p>\r\n<p>\\(V_A=\\) Pre-merger value of the acquirer<\/p>\r\n<p>\\(\\text{C}=\\) Cash paid to target shareholders<\/p>\r\n<p>The least bid that the target company\u2019s shareholders should accept is the pre-merger value of the target company since in the open market, shareholders can sell their shares for a higher price than they would obtain by accepting a low bid. On the other hand, an acquirer&#8217;s shareholders are unwilling to pay a high number for an overvalued target as this will lower the overall value of the acquirer.<\/p>\r\n<p>Thus, the merger analysis depends on assessing the target company&#8217;s value and the estimates of any synergies attained when the companies merge. The payment method\u2014cash or stock\u2014and the bid price reflect the confidence level of management in synergy estimates.<\/p>\r\n<h3>Example: Stock Offer and Cash Offer<\/h3>\r\n<p>Marcus Engineering Ltd. is considering a friendly acquisition of Salt Bay Ltd. The management teams have agreed on a transaction value of $13.00 per share of Salt Bay Ltd. stock. Consider the following information.<\/p>\r\n<p>$$\\small{\\begin{array}{l|c|c} {}&amp; \\text{Marcus} &amp; \\text{Salt Bay}\\\\ \\hline\\text{Pre-merger stock price (\\$)} &amp; \\$ 17 &amp; \\$11 \\\\ \\hline\\text{Number of shares outstanding (millions)} &amp; 80 &amp; 36\\\\ \\hline\\text{Pre-merger market value (\\$ millions)} &amp; \\$1,360 &amp; \\$396\\\\\u00a0 \\end{array}}$$<\/p>\r\n<p>Salt Bay Ltd. is considering the following offers from Marcus.<\/p>\r\n<ol>\r\n\t<li>Stock offer of 0.65 shares of Marcus per share of Salt Bay.<\/li>\r\n\t<li>Cash offer of $13 per share.<\/li>\r\n<\/ol>\r\n<p>Estimate the combined company&#8217;s post-merger value and stock price based on each form of payment and evaluate which offer Salt Bay should accept.<\/p>\r\n<h4>Solution<\/h4>\r\n<h4>Stock Offer<\/h4>\r\n<p>Stock offer of 0.65 shares of Marcus stock per share of Salt Bay stock implies that:<\/p>\r\n<p>Marcus must issue \\(\\text{36 million} \u00d7 0.65= \\text{23.4 million shares}\\) to Salt Bay shareholders.<\/p>\r\n<p>The post-merger value of the company is:<\/p>\r\n<p>$$V_A\u2217=V_{A}+V_{T}+S-C$$<\/p>\r\n<p>$$V_{A\u2217}=\\$1,360+\\$396+\\$100 \u2013 0 = \\text{\\$1,856 million}$$<\/p>\r\n<p>\\(C=0\\) as no cash is paid to target (Salt Bay) shareholders.<\/p>\r\n<p>$$\\text{Post-merger stock price}=\\frac{\\text{\\$1,856m}}{(\\text{80m}+\\text{23.4m})}=\\$17.95\\ \\text{per share}$$<\/p>\r\n<p>$$\\text{Total value paid to Salt Bay}=$17.95\\times23.4\\ \\text{million}=$420.03\\ \\text{million}$$<\/p>\r\n<p>$$\\text{Salt Bay&#8217;s gain}=\\text{Takeover premium}=\\text{P}_{T}-\\text{V}_{T}$$<\/p>\r\n<p>$$\\text{Takeover premium}= \\text{\\$420.03 million} &#8211; \\text{\\$396 million}= \\text{\\$24.03 million}$$<\/p>\r\n<p>$$ \\text{Acquirer\u2019s gain} =\\text{Synergies}-\\text{Premium}=\\text{S}-(\\text{P}_{\\text{T}}-\\text{V}_{\\text{T}}) $$<\/p>\r\n<p>$$\\text{Marcus\u2019 gain (acquirer\u2019s gain)} = \\text{\\$100 million} \u2013 \\text{\\$24.03 million} = \\text{\\$75.97 million}$$<\/p>\r\n<h4>Cash Offer<\/h4>\r\n<p>The cash offer of $13 per share means that Marcus will pay $468 million to acquire Salt Bay Ltd.<\/p>\r\n<p>The price paid to Salt Bay is:<\/p>\r\n<p>$$ \\text{P}_{\\text{T}}=\\$13\\times\\text{36 million}=\\$468\\ \\text{million} $$<\/p>\r\n<p>$$\\text{Salt Bay shareholders\u2019 gain} = \\text{Takeover premium}=\\text{P}_{\\text{T}}-\\text{V}_{\\text{T}}$$<\/p>\r\n<p>$$\\text{Takeover premium}=$468\\ \\text{million}-$396\\ \\text{million}=$72\\ \\text{million}$$<\/p>\r\n<p>$$\\text{Acquirer&#8217;s gain}=\\text{Synergies}-\\text{Premium}=\\text{S}-(\\text{P}_{\\text{T}}-\\text{V}_{T})$$<\/p>\r\n<p>$$\\text{Marcus\u2019 gain (acquirer\u2019s gain)} =$100\\ \\text{million}-$72\\ \\text{million}=$28\\ \\text{million}$$<\/p>\r\n<p>The post-merger value of the company is:<\/p>\r\n<p>$$V_A\u2217=V_{A}+V_{T}+S-C$$<\/p>\r\n<p>$$\\text{V}_A\u2217=\\$1,360+\\$396+\\$100-\\$468=\\$1,388\\ \\text{million}$$<\/p>\r\n<p>The stock price of Marcus will rise to \\(\\bigg(\\frac{$1,388}{\\text{80}}\\bigg) = $17.35\\)<\/p>\r\n<p><strong>Conclusion:<\/strong> The cash offer results in the highest value (takeover premium) to Salt Bay\u2019s shareholders.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Joe Blake, an investment banker, is part of a team tasked with estimating cash offers presented to their client, McDowell Software Inc., in an ongoing acquisition deal between McClurkin Ltd. Both companies agreed on a transaction value of about $13 per share of McDowell\u2019s stock. Blake estimates that the combined company will result in economies of scale worth $70 million. Blake compiled the following data.<\/p>\r\n<p>$$\\small{\\begin{array}{l|c|c} &amp; \\textbf{McClurkin} &amp; \\textbf{McDowell} \\\\ \\hline\\text{Pre-merger stock price} &amp; \\$16 &amp; \\$11 \\\\ \\hline\\text{Number of shares outstanding (millions)} &amp; 70 &amp; 28 \\\\ \\hline\\text{Pre-merger market value (millions)} &amp; \\$1,120 &amp; \\$308\\\\\u00a0 \\end{array}}$$<\/p>\r\n<p>The premium gain the target will get because of the merger is <em>closest to:<\/em><\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>$56 million.<\/li>\r\n\t<li>$364 million.<\/li>\r\n\t<li>$14 million.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>Correct answer is A.<\/strong><\/p>\r\n<p>First, we will calculate the price paid for the target.<\/p>\r\n<p>$$\\text{P}_{\\text{T}}=28\\ \\text{million}\\times\\$13=\\$364\\ \\text{million}$$<\/p>\r\n<p>$$\\text{McDowell&#8217;s gain}=\\text{Takeover premium}=\\text{P}_{\\text{T}}-\\text{V}_{\\text{T}}$$<\/p>\r\n<p>$$\\text{Takeover Premium} = \\$364\\ \\text{million}-\\$308\\ \\text{million} =\\$56\\ \\text{million}$$<\/p>\r\n<p><strong><em>B is incorrect.<\/em>\u00a0<\/strong>This is the price paid for McDowell.<\/p>\r\n<p><em><strong>C is incorrect. <\/strong><\/em>This is the acquirer\u2019s gain \\(=\\$70\\ \\text{million}-\\$56\\ \\text{million}=\\$14\\ \\text{million}\\)<\/p>\r\n<\/blockquote>\r\n<p>Reading 18: Merger and Acquisition<\/p>\r\n<p><em>LOS 18 (h) Evaluate a takeover bid and its effects on the target shareholders versus the<br \/>\r\nacquirer shareholders.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>In a merger and acquisition transaction, the acquirer will always want to get the best possible price for the target, while the target will always want to sell at a higher price. As such, the acquirer usually pays a premium&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,346],"tags":[393,216,344,394,384],"class_list":["post-16268","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-corporate-finance-cfa-level-2","tag-bid-evaluation","tag-cfa-level-2","tag-corporate-finance","tag-los-k","tag-reading-23-mergers-and-acquisition","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Estimated Post-Acquisition Value - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"In merger and acquisition transactions, the target will always want a higher price for the sale of the company, and the acquirer will always want to pay the least possible price for the target.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/corporate-finance-cfa-level-2\/bid-evaluation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Estimated Post-Acquisition Value - 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