Hybrid Golf and Birdie Golfer Merger

The Birdie Golf – Hybrid Golf Merger

Hybrid Golf and Birdie Golf are two companies that have been engaging in talks of merging their company in the past 6 months or so. It is imperative to note that both of these companies are in good position on their own and have niche markets. Moreover, the contemplations of proceeding with the merger is encouraged owing to the fact that it is deemed a beneficial transaction for both of them if the merger actually takes place. In addition, both Birdie and Hybrid will enjoy economies of scale that come along with the transaction. At the present moment, the price at the table is $68.75 for every share of Hybrid’s stock. The purpose of this paper is to conduct a comprehensive analysis regarding the expected value of Hybrid so as to determine whether the price given ought to be accepted by Birdie or not. In addition, the analysis will take into consideration the ideal and appropriate exchange ratios that can be agreeable between the two companies.

1. Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should Birdie proceed with the merger?
As given, the stock outstanding at Hybrid stands at 5.2 million shares. Supposing that there is an agreement of a merger price of $68.75 for every share, then it means that Hybrid’s shareholders will receive a total amount of:
5,200,000 × 68.75 = 357,500,000

This is the total amount that will be paid by Birdie if such an agreement is attained. In this regard, the decision by Birdie to go ahead with the merger ought to be determined whether the total stakeholders’ amount computed above is equivalent to the expected value of the firm. The expected value of Hybrid in five years will be $576 million with a debt amount of $192 million. This implies that the expected value less the debt value is
$576 m - $196m = $384 m.

The inference of this is that Birdie should proceed with the merger for the reason that the price quoted by Hybrid is lower than the expected value of the firm.

2. What is the highest price per share that Birdie should be willing to pay for Hybrid?
The expected value of Hybrid less the amount of debt of the company will be $384. Taking into consideration that the number of outstanding shares is 5.2 million, then it implies that the highest price per share that Birdie should be willing to pay is:
$384m / 5.2m = $73.84

It is imperative to note that the maximum amount that Birdie should pay out to Hybrid should not surpass the company’s expected value and therefore the maximum price per share that it should be willing to pay is $73.84 (Saunders and Cornett, 2003).

3. Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $68.75 per share?
When mergers take place, they do not always involve cash transactions. In these sorts of instances, the acquirer, in this case Birdie, more often than not exchanges its shares for the shares of the acquire, in this case Hybrid, at a certain ratio (Ross et al., 2013). In this form of interchange of shares, there ought to be an appropriate exchange ratio that makes certain that the number of shares actually being traded by the shareholders of the acquire organization, Hybrid company, are equivalent to the total value of shares being received from the acquirer, Birdie Company. As outlined in the case study, the market value of a share of Birdie’s stock stands at $94. On the other hand, the merger price in this regard stands at $68.75 for every share.

The exchange ratio is computed as follows:

1 / ($94 / $68.75) = 0.73
The inference of this ratio is that for every 1 share given, the shareholders of Hybrid Company will be given 0.73 shares of Birdie’s share in return.
4. What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?
As earlier pointed out, the maximum price per share that it should be willing to pay is $73.84. Therefore, the highest exchange ratio Birdie would be willing to pay and still undertake the merger can be computed as follows:
1 / ($94 / $73.84) = 0.7855

The inference of this is that at its maximum, Birdie should be willing to pay 0.79 of its shares in return for 1 share of Hybrid’s stock so as to proceed with the merger.

In conclusion, it can be noted that by scrutinizing and analyzing the financial statements of a company, it becomes conceivable to ascertain the value to be incurred during the merger. In this regard, it is expected that the merger between Hybrid and Birdie will augment both of their financial positions. Notably, the price quoted by Hybrid stakeholders is relatively lower in comparison to its expected value. As a result, it can be recommended for Birdie to agree to such a price of $68.75 and proceed with the merger. In fact, the maximum price that Birdie ought to be willing and ready to pay so as to go on with the merger is $73.84. In the event that Birdie is inclined or has a preference for conducting a stock exchange, then the maximum ratio that the firm should agree to is 1:0.78.

References
Ross, S. Westerfield, R. & Jordan, B. (2013). Essentials of Corporate Finance. USA; McGraw-Hill Publishers.
Saunders, A., & Cornett, M. M. (2003). Financial institutions management: A risk management approach. Irwin/McGraw-Hill.