Schweser Practice Exams V1 Exam 2 Morning - Question 9 - Post-merger valuation (stock offer)

CFA Level II Corporate Finance
#1

I might be missing something here, but… It is about the calculation of the economic impact for the target shareholders after a stock offer for an acquisition.

Their solution is as follows:

Value of Fedora and Ubunta post cash acquisition (given) = $135 million.

Value of Fedora and Ubunta post stock acquisition = $135 million + $90 million cash = $225 million.

Number of shares outstanding post stock acquisition = 5 + 3 = 8 million.

Value of shares received based on their likely post-acquisition price = [(225m) / 8m] × 3m = $84,375,000.

Gain to Debian’s shareholders is therefore $84,375,000 - $85,000,000 = -$625,000.

Now what I didn’t get it is, why are we adding the $90 million cash to the combined value of the firm post-merger if it was a stock acquisition (and thereafter, there was no $90m cash payment - just the issuance of 3m new shares)?

#2

the synergy will stay the same either case, which is 8M.

Va*=Va+Vt+S-C (cost will be 0 since this is a stock offer), we will get Va*=225

#3

But how do we know Vat is still 225m in the stock offering option? Because the only thing we know is that Fedora will issue 3m new shares to pay for Ubuntu.