ACC 204 – Velcro Saddles is contemplating the acquisition of Pogo
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Pogo. (a) What is the gain from the merger? (b) What is the cost of the cash offer? (c) What is the NPV of the acquisition under the cash offer?Suppose that instead of making a cash offer as in the previous problem, Velcro Saddles considers offering Pogo shareholders a 50% holding in Velcro Saddles. (a) What is the value of the stock in the merged company held by the original Pogo shareholders? (b) What is the cost of the stock alternative? (c) What is the merger’s NPV under the stock offer?