ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers
Elm plc acquires Fir plc. Fir's stand-alone value is $300m. Elm expects post-acquisition annual after-tax cost savings of $9m in perpetuity, starting next year, with integration costs of $20m payable immediately (after tax). The synergy cash flows are discounted at 10%. Elm offers Fir's shareholders $320m. What is the net present value of the acquisition to Elm's shareholders?
The NPV to Elm's shareholders is $50m. Perpetual savings of $9m at 10% are worth $90m, less $20m integration costs gives $70m net synergy. Subtracting the $20m premium paid over Fir's $300m stand-alone value leaves $50m.
- A$50m
- B$70m
- C-$10mCorrect
- D-$30m
Explanation
PV of savings = 9/0.10 = $90m. Net synergy after integration costs = 90 - 20 = $70m. Elm pays a premium of 320 - 300 = $20m. NPV to Elm = 70 - 20 = $50m. This gives $50m.
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