In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corp. for $1.4 billion. At the
Question:
In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corp. for $1.4 billion. At the time of the acquisition, the relevant information about the two companies was as follows:
| Novell | WordPerfect | |
| Revenues | 1,200 | 600 |
| Cost of goods sold | 57% | 75% |
| Depreciation | 42 | 25 |
| Tax rate | 35% | 35% |
| Capital expenditures | 75 | 40 |
| Working capital (% of revenue) | 40% | 30% |
| Beta | 1.45 | 1.25 |
| Expected growth rate during high-growth period | 25% | 15% |
| Expected period of high growth | 10 | 10 |
| Growth rate after high-growth period | 5% | 5% |
| Beta after high-growth period | 1.1 | 1.1 |
Capex will be 115% of depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%.
a) Estimate the value of Novell, operating independently.
b) Estimate the value of WordPerfect, operating independently.
c) Estimate the value of the combined firm, with no synergy.
d) As a result of the merger, the combined firm is expected to grow 24% a year for the high growth period. Estimate the value of the combined firm with the higher growth rate.
e) What is the synergy worth? What is the maximum price Novell can pay for WordPerfect?
Expert Answer:
a Novells value can be estimated using the static model Value of equity Present value of cash flows to equity holders Revenues and costs can be forecast using the expected growth rates Depreciation an... View the full answer
