The Birdie Glove-Hybrid Glove Merger

Birdie Golf, Inc. has been in merger talks with Hybrid Golf Company for the past six months.
After several rounds of negotiations, the offer under discussion is a cash offer of $550 million
for Hybrid Golf. Both companies have niche markets in the golf club industry, and the
companies believe a merger will result in significant savings in general and administrative
expenses. Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger
negotiations. Bryce has prepared the following pro forma financial statements for Hybrid
Golf assuming the merging takes place. The financial statements include all synergistic
benefits from the merger:

2008 2009 2010 2011 2012

1,000,000, 1,125,000,00 1,250,000,
Sales 800,000,000 900,000,000 000 0 000
Production 700,000,00 875,000,00
costs 562,000,000 630,000,000 0 790,000,000 0
Depreciatio
n 75,000,000 80,000,000 82,000,000 83,000,000 83,000,000
Other 100,000,00 125,000,00
expenses 80,000,000 90,000,000 0 113,000,000 0
118,000,00 167,000,00
EBIT 83,000,000 100,000,000 0 139,000,000 0
Interest 19,000,000 22,000,000 24,000,000 25,000,000 27,000,000
Taxable 140,000,00
Income 64,000,000 78,000,000 94,000,000 114,000,000 0
Taxes
(40%) 25,600,000 31,200,000 37,600,000 45,600,000 56,000,000
Net Income 38,400,000 46,800,000 56,400,000 68,400,000 84,000,000

Bryce is also aware that the Hybrid Golf Division will require investments each year for
continuing operations, along with sources of financing. The following table outlines the
required investments and sources of financing.

2008 2009 2010 2011 2012

Investments
Net working capital 20000000 25000000 25000000 30000000 30000000
Fixed assets 15000000 25000000 18000000 12000000 7000000
Total 35000000 50000000 43000000 42000000 37000000
Sources of
financing:
New Debt 35000000 16000000 16000000 15000000 12000000
Profit retention 0 34000000 27000000 27000000 25000000
Total 35000000 50000000 43000000 42000000 37000000

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not optimal.
If the merger take place, Hybrid Golf will immediately increase its leverage with a 110
million debt issue, which would be followed by a 150 million dividend payment to Birdie
Golf. This will increase Hybrid's debt to equity ratio from .50 to 1.00. Birdie Golf will also be
able to use a 25 million tax loss carryforward in 2009 and 2010 from Hybrid Golf's previous
operations. The total value of Hybrid Golf is expected to be 900 million in five years, and
the company will have 300 million in debt at that time.

Stock in Birdie Golf currently sells for 94 a share, and the company has 18 million shares of
stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both companies
can borrow at an 8% interest rate. The risk-free rate is 6%, and the expected return on the
market is 13%. Bryce believes the current cost of capital for Birdie Golf is 11%. The beta for
Hybrid Golf stock at its current capital structure is 1.30.

Bryce has ased you to analyze the financial aspects of the potential merger. Specifically, he
has asked you to answer the following questions:

1. Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should
Birdie proceed with merger?
2. What s the highest price per share that Birdie should be willing to pay for Hybrid?
3. Suppose Birdie is unwilling to pay cash for the merger but will consider a stock
exchange. What exchange ratio would make the merger terms equivalent to the
original merger price of $68.75/share?
4. What is the highest exchange ratio Birdie would be willing to pay and still undertake
the merger?

Diketahui :
ß = 1,30

Return of Market (RPM) = 13%

Risk Free rate(rRF) = 6%

Interest Rate = 8%

Cost of Debt (rd) = (Rf + Interest Rate) (1 – Tax) = 6.4%

Debt setelah merger = 110 jt

Debt sebelum merger = -40 juta

Dividen setelah merger = 150 jt

Dividen sebelum merger = -80 juta

Rasio Hutang / Debt dengan Equity sebelum merger = 0.5

Rasio Hutang / Debt dengan Equity sesudah merger = 1

wd Sesudah merger = (D / D+S) = (110 jt / 260 jt) = 42,3%

ws Sesudah merger = (S / D+S) = (150 jt / 260 jt) = 57,7%

Maka wd Sebelum merger = (D / D+S) = (-40 jt / -120 jt) = 33,3%

Dan ws Sebelum merger = (D / D+S) = (-80 jt / -120 jt) = 66,7%

Harga Saham Birdie Golf = 94$ per lembar

Jumlah saham Birdie Golf = 18 juta

Nilai Birdie Golf menurut saham = 18 juta x 94 = 1.692.000.000

Jumlah saham Hybrid Golf = 8 juta

Cash yang ditawarkan untuk syarat merger = 550 juta

Perkiraan Market Value Hybrid Golf setelah 5 tahun = 900 juta

Perkiraan Hutang Hybrid Golf setelah 5 tahun = 300 juta

Tax Loss dari merger = 25 juta

Ketika Struktur modal dan WACC (Weighted Average Cost Capital) tidak tetap,
maka untuk menilai Value dari suatu merger tersebut digunakan model APV atau
Adjusted Present Value, dengan langkah sebagai berikut :

Langkah

Cari BCC's pre-merger cost of equity dan unlevered cost of equity:

Biaya Ekuitas sebelum merger =

rsL = rRF + (RPM) ß
= 6% + (13%)1.30 = 22,9%.
Biaya Ekuitas tanpa leverage sebelum merger
rsU = wdrd + wsrsL = 0.423(6.4%) + 0.577(22.9%) = 18.95%
= 2,702% + 13,2133% = 15, 9153%
after the merger, BCC will have 42,3 percent of debt costing 6,4%, so its
levered cost of equity and WACC will be:

rsL = rsU + (rsU –rd)(D/S)

= 15, 9153% + (15, 9153% - 6,4%)(42,3/57,7)

= 22,891%

WACC = wdrd(1-T) + wsrs

= 0,423 (6.4%)(1-0.40) + 0,577 (22,891%)

= 1,62432% + 13,2081%

= 14, 8324%

Free cash flows = NOPAT - net retentions =

Free Cash
Flow 2008 2009 2010 2011 2012
8000000 9000000 1000000 1125000 125000000
Sales 00 00 000 000 0
Production 5620000 6300000 7000000 7900000
costs 00 00 00 00 875000000
Depreciati 7500000 8000000 8200000 8300000
on 0 0 0 0 83000000
Other 8000000 9000000 1000000 1130000
expenses 0 0 00 00 125000000
8300000 1000000 1180000 1390000
EBIT 0 00 00 00 167000000
NOPAT = 4980000 6000000 7080000 8340000
EBIT (1-T) 0 0 0 0 100200000
Net 3500000 5000000 4300000 4200000
Retentions 0 0 0 0 37000000
Free Cash 148000 100000 2780000 4140000
Flow 00 00 0 0 63200000

Perhitungan g diasumsikan = 2%

- Horizon Value FCF 2012 (HVU, 2012)

= FCF2012 (1 + g) / (rsU + g)

= 63,200,000 (1.02) /0.1483 – 0.02

= 61.960.784 / 0,1283

= $482,936,744.46

- Horizon Value Tax Shield (HVU, TS) =

2008 2009 2010 2011 2012

190000 220000 240000 250000 270000
Interest 00 00 00 00 00
Tax 760000 880000 960000 100000 108000
Shield 0 0 0 00 00

= TS2012 (1 + g) / (rsU + g)
 = 10,800,000 (1.02) /0.1483 – 0.02

= 11,016,000 / 0,1283

= $85,861,262.6656

Cash Flow to be discounted at the unlevered cost of

equity :

2008 2009 2010 2011 2012

1480000 1000000 2780000 414000 6320000
Free Cash Flow 0 0 0 00 0
Unlevered Horizon 4829367
Value 44
FCF + Horizon 1480000 1000000 2780000 414000 5631191
Value 0 0 0 00 01
Interest Tax 100000 1080000
Saving 7600000 8800000 9600000 00 0
Tax Shield Horizon 8586126
Value 3
TS + Horizon 100000 9622921
Value 7600000 8800000 9600000 00 3

Vunlevered = (14800000 / 1 + 0.1483) + (10000000 / 1 +

0.1483)^2 +

(27800000 / 1 + 0.1483)^3 +(41400000 / 1 +

0.1483)^4 +

(63200000+ 482936744 / 1 + 0.1483)^5

= $376237199,7

VTax Shield = (7600000 / 1 + 0.1483) + (8800000 / 1 +

0.1483)^2 +

(9600000 / 1 + 0.1483)^3 +(10000000 / 1 +

0.1483)^4 +
 (10800000+85429213/ 1 + 0.1483)^5

= $78972706,2

Estimated Hybrid Golf Equity Value = $455.209.906 +

25000000 = $470.209.906

Nilai tersebut lebih rendah dari yang diestimasi Birdie Golf, yaitu
$600.000.000

1. Dengan penawaran saham $68.75 per lembar, maka NPV dari

penawaran ini adalah :

= $1.692.000.000 + $470.209.906 – $68.75(8.000.000)

= $1.612.209.906

Karena NPV positif maka penawaran ini dapat diterima.

2. Maximum Bid Price = $68.75 + ($1.612.209.906 / 8.000.000) =

$270,2762

3. Harga Saham Birdie Golf = 94$ per lembar

Jumlah saham Birdie Golf = 18 juta

Jumlah saham Hybrid Golf = 8 juta

Penawaran saham $68.75 per lembar = $68.75(8.000.000) =

$550.000.000

α = New Shares issued / Old Shares + New Shares Issued (N)

α x $2.162.209.906 = $550.000.000

α = 0,2543

0,2543 = N / 18.000.000 + N

4.500.000+ 0.2543N = N
 0.7457 N = 4.500.000

N = 6.034.598 shares untuk 8 juta shares Hybrid Golf

Atau rasio 0,7543 :1

4. Highest Exchange Ratio

Penawaran saham $94 per lembar = $94(8.000.000) =

$752.000.000

α = New Shares issued / Old Shares + New Shares Issued (N)

α x $2.162.209.906 = $752.000.000

α = 0,3478

0,3478 = N / 18.000.000 + N

6.260.262 + 0.3478N = N

0.6522 N = 6.260.262

N = 9.598.684 shares untuk 8 juta shares Hybrid Golf

Atau rasio 1,1998 :1