An all-equity firm worth $50 billion acquires for $4 billion cash a firm whose postacquisition value will be $6 billion.The acquiring firm had the cash and did not need to borrow.The current market value of the target is $3 billion.What is the estimated return to the shareholders of the acquiring firm?

Question

Quizplus · Accepted Answer

The acquiring firm spends $4 billion in cash to acquire a firm that will be worth $6 billion post-acquisition, effectively generating a $2 billion increase in value on a $4 billion investment. This results in a 50% return on the specific acquisition investment. However, the question asks for the return to the shareholders of the acquiring firm, which is worth $50 billion. The $2 billion increase in value on the acquiring firm's overall value of $50 billion results in a 4% return to the shareholders of the acquiring firm.

An All-Equity Firm Worth $50 Billion Acquires for $4 Billion