Acquisitions Inc is a brick and mortar retail company. Acquisition’s management believes that the company needs to establish an on-line presence in order to remain viable. For that reason, Acquisition would like to purchase Target Company, an on-line company in a similar line of business. Acquisition believes that Target would also benefit from the merger by gaining access to a brick and mortar outlet.
Some basic information about Acquisition and Target follows:
Analysts hired by Acquisition to value the merger estimate that if the two companies merge, their combined revenues will increase by 5 percent for 3 years and for 3% thereafter. Cost of Goods Sold for the combined firms will be permanently reduced by 2%.
1. The status-quo values of Acquisition and Target, using each firm’s WACC to value its assets.
2. The WACC for the combined firm
3. The value of the combined firm with potential synergies considered.
4. Should the merger take place?