Case 3: Mergers & Acquisitions

Case 3: Mergers & Acquisitions Genie Inc. is a manufacturer of kitchen appliances. After having been in business for 56 years, the firm is currently experiencing stable growth of 2 to 3% per year. Many industry experts consider Genie Inc. as a mature company, Genie's current share price is $20, with 2,500,000 shares outstanding; weighted cost of capital (WACC) is 15%. The company's most recent financial statements are shown below: Statement of Comprehensive Income (in $000) Sales $10,000 Cost of goods sold 7,000 Operating expenses 1,000 EBDIT 2,000 Depreciation 200 EBIT 1,800 Interest expense 1,342 Taxable income 458 Taxes (40%) 183 Net income $ 275 $ 1,000 3,417 Statement of Financial Position (in $000) Cash $ 8000 Accounts payable Inventory 583 Notes payable Accounts receivable 833 Current assets 9,417 Current liabilities Long-term debt Net fixed assets 20,000 Equity Total assets $29,417 Total liabilities & equity 4,417 10,000 15,000 $29,41 7 Genie has accumulated cash reserves of $8 million, and its CEO, Mr. Lionel Rich, believes that it is a good time to think about boosting Genie's sales growth by acquiring another company that is younger, with better growth opportunities. Mr. Rich has narrowed down the choice to one potential target: Aladdin Corporation Aladdin is a relatively young company; it has only been in business for five years. Its main products are a line of extremely popular espresso machines. Its shares are selling at $7.50 per share. It has 1,000,000 shares outstanding, and a WACC of 18%. Aladdin's financial statements are shown below: Statement of Comprehensive Income (in $000) Sales Cost of goods sold Operating expenses EBDIT Depreciation EBIT Interest expense Taxable income Taxes Net income $2,000 1,300 160 540 40 500 297 203 81 $ 122 Most Recent Statement of Financial Position ($000) $ 200 Accounts payable 108 Notes payable $ 500 475 Cash Inventory Accounts receivable Current assets 167 475 Current liabilities Long-term debt 7,500 Equity $7,97 Total liabilities & 5 equity 975 2000 5,000 $7,97 5 Net fixed assets Total assets Mr. Rich estimates that the synergistic benefits from this acquisition will be $300,000 per year for the foreseeable future. His analysis also indicates that Genie can acquire Aladdin by paying $7.75 million in cash, or by swapping one Genie share for three Aladdin shares. Before Mr. Rich can take his recommendation to Genie's Board of Directors, he needs answers to the following questions: 1. If Genie went ahead with the acquisition of Aladdin, what is the total value of the acquisition? (10 marks) 2. What is the maximum price per share that Genie should be willing to pay for this acquisition? (5 marks) share after the acquisition? (15 marks) 4. What are the factors that determine whether the company should use cash acquisition or stock acquisition? (10 marks) 5. Discuss five different defensive tactics that the target company can use to thwart this takeover attempt. (15 marks) 6. 7. What are the possible cash flow benefits from this acquisition? (12 marks) Should the company consider diversification as a benefit of this acquisition? (5 marks) Should Genie go ahead with the acquisition using cash or stock acquisition? (28 marks) 8