Box plc is considering the acquisition of Circle plc. The former is valued at £100m and the latter at £50m by the market.
Economies of scale will result in savings of £2.5m annually in perpetuity. The required rate of return on both firms and the combination is 11 per cent.
The transaction costs will amount to £1m.
A. What is the present value of the gain form the merger?
B. If a cash offer of £70m is accepted by Circle's shareholders what is the value created for Box's shareholders?
C. If shares are offered in such a way that Circle's shareholders would possess one-third of the merged entity, what is the value created for Box's shareholders?