Firm a Plans to Acquire Firm B by Making a Cash

Firm A plans to acquire Firm B by making a cash offer of $27 a share for all 100,000 shares of B. It estimates that the merger will produce cost savings with a present value of $800,000. Recently, Firm B's stock price increased from $20 to $24 per share, evidently due to its excellent financial performance. Firm A thus estimates Firm B's stand-alone price at $24. However, the CFO suggests a re-evaluation of the offer, pointing out that the true stand-alone value of Firm B may be $20 per share, not $24 per share. If the stand-alone value is $20 per share, will the merger still generate positive NPV for Firm A?

A) No. The cost to acquire Firm B will exceed the postmerger gain of $800,000.
B) No. Firm A will break even, since the costs are $400,000 more than expected.
C) Yes. Firm A will still make a gain, although Firm B captures more of the economic gain than expected.
D) Yes. Since the market is efficient, the true stand-alone value of Firm B is $24 per share and the CFO's fear is unwarranted.