Reference no: EM132392677

On September 4^th, 2009 (Friday), Cadbury's shares closed trading at 5.71 pounds a share in London. The firm had 1.37 billion shares outstanding at that point. At current exchange rates, the market valuation of the firm in dollars was 12.83 billion dollars. On the weekend of September 4^th to 7^th (Monday was a holiday), Kraft announced a bid for all of Cadbury's shares. The bid, which included both cash and shares, valued Cadbury at 7.45 pounds a share.

One analyst estimated that the merger would produce 475 million dollars of annual cost savings, from operations, general and admnistrative expenses and marketing. These annual cost savings are expected to begin a year from now, and grow at 2% a year. In addition the analyst is assuming an after-tax integration cost of 1.5 billion, and taxes of 30%. Assume that the integration cost of 1.5 billion happens right when the merger is completed (one year before the annual cost savings begin). The analyst is using a cost of capital of 7.5% to value the synergies.

a) Compute the value of the synergy as esimated by the analyst. Please show your calculations.

b) Does the estimate of synergies in a) justify the premium that Kraft offered to Cadbury?

Greatly appreciate any/all help.