Suppose the instead of making a cash offer, Velcro Saddles considers offering POGO shareholders a 50% holding in Velcro Saddles.
a) What is the value of the stock in the merged company held by the original POGO shareholders?
b) What is the cost of the stock alternative?
c) What is the merger's NPV under the stock offer?
Velcro value = $20M
POGO value = $10M
Velcro estimates it can save $500,000 annually in perpetuity by merging in reduction of marketing and admin costs
Velcro is willing to pay $14M in cash for Pogo
Opportunity cost of capital = 8%