After Analyzing the Particulars of Firms a and B and Their

question 6

Essay

After analyzing the particulars of firms A and B and their proposed merger, comment on the desirability of the merger:
A. The merged firms are expected to be worth $26,000. Be sure to mention EPS of the merged entity, and so on.
From the value of the merged firms, it can be seen that this merger has no expected synergies. Namely, the sum of the premerger values is equal to the postmerger value. After the merger, there will be 1,625 shares of the new stock outstanding, and total earnings should be $4,000, which is precisely the previous sum of earnings. However, now the earnings per share are $2.46, which appears attractive relative to either of the previous EPS amounts. The P/E ratio should be 6.5, which is between the firms' previous P/Es. It may be possible to fool some investors; however, this merger does not appear to have accomplished anything of financial consequence, and represents an example of the bootstrap effect.

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Definitions:

Freedom to Farm Act

U.S. legislation passed in 1996 that aimed to reduce government control over farming operations and allow farmers more freedom in their planting decisions.

Countercyclical Payments

Government payments made to farmers and businesses to provide financial support during periods of economic downturn.

Food-Stamp Program

A government assistance program that provides low-income individuals and families with benefits to buy food.

Farm Products

Items derived from agricultural activities, including both plant-based foods and animal products, essential for human consumption and use.