You have been asked to provide advice on two potential acquisition opportunities. These are the data on the bidder and the two potential targets.
Bidder Target 1 Target 2

EBITDA 11500 4000 8500

Shares 1000 250 100

Share Price 100 200 500

P/E 15 20 10

Market value of Debt 20000 0 10000

Operating synergies between the bidder and both targets are valued at 20000, but it will take two years before any synergies are realised. Until then, the profits of the companies will remain unchanged. Target 1 has indicated that it would be amenable to a cash bid of 260 per share for its equity. Since the bidder does not have these funds available, it would have to borrow the money at a 3% interest rate. Target 2 has requested a payment in shares suggesting that it would accept 650 shares of the bidder in exchange for the 100 target shares. The corporate tax rate is 30%.

1) Compute the purchase price of both acquisitions; that is, what will you pay for the equity of each of the targets based on the bids mentioned above? Which target is more expensive? Assume that the acquisition does not affect the value of the firms’ debts. 

2) Which acquisition is likely to have the largest impact on the earnings per share of the bidder in the year after the acquisition? 

3) Which acquisition is most beneficial for the bidder? Should we take into account the tax shields associated with the debt in computing these benefits? Assume that the value of the bidder’s debt remains unchanged as a result of the acquisition.