nee answers for thr following case study

Project Description:

@home network merger with excite inc case study
background
@home network announced its merger with excite inc. in january 1999 for $6.7 billion. prior to the announcement, excite’s market value was about $3.5 billion. the transaction closed in may 1999. the announced purpose of the transaction was to create a new media company capable of providing home and business customers high speed, 24-hour access to personalized services from their pcs, pagers, cellular phones, and television sets. the new company combines the search engine capabilities of one of the best known brands on the internet, excite, with @home’s agreements with 21 cable companies worldwide. @home gains access to the nearly 17 million households that are regular users of excite.
at the time, this transaction constituted the largest merger of internet companies ever. as of july 1999, excite @home displayed a p/e ratio in excess of 260 based on the consensus estimates for the year 2000 of $0.21 per share. the firm’s market value was $18.8 billion, 270 times sales. investors really had great expectations for the future performance of the combined firms, despite their lackluster profit performance since their inception.
founded in 1995, @home provided interactive services to home and business users over its proprietary network, telephone company circuits, and through the cable companies’ infrastructure. cable connections provide connections at more than 100 times the speed of dial-up services. @home also provides branded content in this broadband environment. subscribers pay $39.95 per month for the service.

assumptions
• excite is properly valued immediately prior to announcement of the transaction.
• annual customer service costs equal $50 per customer.
• annual customer revenue in the form of @home access charges and ancillary services equals $500 per customer. this assumes that declining access charges in this highly competitive environment will be offset by increases in revenue from the sale of ancillary services.
• none of the current excite user households are current @home customers.
• new @home customers acquired through excite remain @home customers in perpetuity.
• @home converts immediately 2% or 340,000 of the current 17 million excite user households. a 2% response rate is typical of both online and direct mail solicitations.
• @home’s cost of capital is 20% during the growth period and drops to 10% during the slower, sustainable growth period; its combined federal and state tax rate is 40%.
• capital spending equals depreciation; current assets equal current liabilities.
• fcff from synergy increases by 15% annually for the next 10 years and 5% thereafter. its cost of capital after the high-growth period drops to 10%.
• the maximum purchase price @home should pay for excite equals excite’s current market price plus the synergy that results from the merger of the two businesses.

• did @home overpay for excite? you are required to show all calculations, data and analysis using correct course concepts to support your response to this question. discuss. note: it is necessary to also calculate the estimated value of synergy to answer this question.

• what is the maximum purchase price for excite including synergy? assume another company was evaluating excite as a merger candidate, would it obtain the same value? discuss.

• assume that excite has 63 million shares outstanding. these shares are traded relatively frequently. should the merger go ahead at the current offer of $6.7 billion? how much would the stock price be valued at that level, and how much of a premium or discount would this represent? on the other hand, based on the maximum computed purchase price for excite (including synergy) referenced in bullet #2 above, determine the price per share associated with this maximum purchase price. discuss.

• discuss other assumptions that you might consider in addition to those identified in this case study.

• discuss the limitations of the valuation method employed in this case.
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