Reference no: EM132509511

Microsoft Co. is considering a takeover of Zoom Inc. Microsoft has 150 Million shares outstanding that are currently trading at $50 per share. Zoom has 20 Million shares outstanding trading at $25 per share. Microsoft's Board of Directors believes that Zoom is currently not operated efficiently. The appropriate discount rate for both firms is 10%. Both firms face a 20% tax rate.

a) Suppose Microsoft has offered to pay Zoom's shareholders $600 Million in cash to acquire Zoom. What is the minimum amount of after-tax synergies per year created by the acquisition that would justify such an offer? (Hint: Assume that the annual synergies are constant and perpetual.)

b) Microsoft's consultants have determined that the acquisition of Zoom will generate annual synergies of $12.50 Million before taxes. Including these synergies, what would be the market value of the combined company (Micro-Zoom) after the acquisition?

c) Suppose that instead of using cash, Microsoft is offering the shareholders of Zoom 10 Million new shares in Microsoft as payment. (Hint: You can assume the same constant, perpetual, annual synergies as in part (b))

- What will be the new share price of Microsoft after the acquisition?

- What is the premium (in $ per share) that Zoom shareholders would receive in this case?