1. Purchase price premiums contain a synergy premium and a control premium. The control premium represents the amount an acquirer is willing to pay for the right to direct the operations of the target firm. Assume that Cliffs would not have been justified in paying a control premium for acquiring Alpha. Consequently, the Cliffs’s offer price should have reflected only a premium for synergy. Did Cliffs overpay for Alpha? Explain your answer.

2. Based on the information in Table and the initial offer price of $10 billion, did this transaction implicitly include a control premium? How much? In what way could the implied control premium have simply reflected Cliffs potentially overpaying for the business? Explain your answer.

3. The difference in postacquisition EPS between an offer price in which Cliffs shared 100% of synergy and one in which it would share only 10% of synergy is about 22% (i.e., $3.72 ÷ $3.04 in 2008). To what do you attribute this substantial difference?

In an effort to exploit the long-term upward trend in commodity prices, Cleveland Cliffs, an iron ore mining company, failed in its attempt to acquire Alpha Natural Resources, a metallurgical coal mining firm, in late 2008 for a combination of cash and stock. In a joint press release on November 19, 2008, the firms announced that their merger agreement had been terminated due to adverse “macroeconomic conditions” at that time. Nevertheless, the transaction illustrates how a simple simulation model can be used to investigate the impact of alternative offer prices on postacquisition earnings per share.