Growth Corporation is trading at $102 per share on 11/1/06 when it makes a bid of 0.667 shares of Growth Corp. for each outstanding share of Target Corp. Target has 40M shares outstanding, and Growth Corp. has approximately 30M shares outstanding. Target closed at $50 per share on 10/31/06.
On 11/19/06, Bidder Corp. makes a bid of 2.5 shares of Bidder's stock for each share of Target. Bidder is trading at $29 on 11/19/06 with 90M shares outstanding.
The fair market value of Target's net identifiable assets is $1,020M at the time of the offers. Target's expected earnings for 2006 are $250M.
Growth Corporation's earnings for 2006 are expected to be $125M. Bidder Corp.'s earnings for 2006 are expected to be $330M.
a. How much of a percentage premium over the market price was Growth Corporation prepared to pay for Target?
b. Assuming the stock market is efficient, why would one company be prepared to pay a premium over current market value to acquire another company?
c. Assume both companies (Growth Corp. and Bidder Corp.) are expected to use pooling-of-interest accounting method to record their acquisition of Target (if they are successful). Assume any successful merger will take place on December 31, 2006. Determine for each of the proposed acquisitions whether it will increase or decrease the earnings per share of the acquiring corporation for 2006.
d. If Growth Corporation used purchase accounting instead of pooling, would this change your answer in c? Explain in full.

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The Answer of Growth Corporation is trading at $102 per share on 11/1/06 when it makes a bid of 0.667 shares of Growth Corp. for each outstanding share of Target Corp. Target has 40M shares outstanding, and Growth Corp. has approximately 30M shares outstanding. Target closed at $50 per share on 10/31/06.
On 11/19/06, Bidder Corp. makes a bid of 2.5 shares of Bidder's stock for each share of Target. Bidder is trading at $29 on 11/19/06 with 90M shares outstanding.
The fair market value of Target's net identifiable assets is $1,020M at the time of the offers. Target's expected earnings for 2006 are $250M.
Growth Corporation's earnings for 2006 are expected to be $125M. Bidder Corp.'s earnings for 2006 are expected to be $330M.
a. How much of a percentage premium over the market price was Growth Corporation prepared to pay for Target?
b. Assuming the stock market is efficient, why would one company be prepared to pay a premium over current market value to acquire another company?
c. Assume both companies (Growth Corp. and Bidder Corp.) are expected to use pooling-of-interest accounting method to record their acquisition of Target (if they are successful). Assume any successful merger will take place on December 31, 2006. Determine for each of the proposed acquisitions whether it will increase or decrease the earnings per share of the acquiring corporation for 2006.
d. If Growth Corporation used purchase accounting instead of pooling, would this change your answer in c? Explain in full.

Growth Corporation Is Trading at $102 Per Share on 11/1/06