Acquisition by Exchanging Stock

Acquisition by Exchanging Stock. Company R wishes to acquire company S. Company R's stocksells for $100 per share. Company S's stock sells for $40 a share. Due to merger negotiations,company R offers $50 a share. The acquisition is done through an exchange of securities. Whatis the ratio of exchange?SOLUTIONAmount paid per share of the acquired company - $50--= 0.5Market price of the acquiring company's shares $100

Earnings per Share. The following data concerning companies A and B are presented:1.76Company A Company BNet income $35,000 $50,000'

Shares outstanding 5,000 10,000Earnings per share $7.00 $5.00P ratioE 10 14Market price $70 $70

Company B is the acquiring company, exchanging its shares on a one-for-one basis for company A's shares. The exchange ratio is based on the market prices of company A andcompany B stock.( a ) What will earnings per share be subsequent to the merger? (6) What is the change inearnings per share for the stockholders of companies A and B?SOLUTIONB Shares Owned EPS before EPS afterafter Merger Merger Merger59A stockholders $7.00 $5.67"0 0

B stockholders 10,Ooo $5.67"$5.00Total 15,000

"Total net income is calculated as follows:

5,000 shares X $7 $35,00010,000 shares X $5 50,000New EPS $85,000

- $8s˜m $5.67total net income--- -EPS =15,000total sharesEPS decreases by $1.33 for company A stockholders but increases by $0.67 for company B(b)stockholders. 429MERGERS AND ACQUISITIONSCHAR 171

1.77 Exchange Ratio. The following information is provided:Price per ShareMarket Price per Share

Market Price per Shareof Acquired Company OfferedCase of Acquiring Company$501 $40$80$180$1602 $120

For each case, determine (a) the exchange ratio in shares, and ( 6 ) the exchange ratio inmarket price.SOLUTION

(6) Market PriceCase (a) Shares1 $50/$80 = 0.625 $50/$40 = 1.252 $180/$120 = 1.5 $180/$160= 1.125