Company A is preparing a deal to acquire company B. One analyst estimated that the...
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Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now, and grow at 2.5% a year. In addition the analyst is assuming an after-tax integration cost of 0.75 billion, and taxes of 20%. Assume that the integration cost of 0.75 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies.
Company Bs equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B.
a) Compute the value of the synergy as estimated by the analyst. Please show your calculations.
b) Does the estimate of synergies in a) justify the premium that company A offered to company B? (1 paragraph at most)
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