In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for
$1.4billion.
Atthetimeoftheacquisition,therelevantinformationaboutthetwo companies was as follows:
|
Novell |
WordPerfect |
|
|
Revenues |
$1,200.00 |
$600.00 |
|
Costof Goods Sold (w/o Depreciation) |
57.00% |
75.00% |
|
Depreciation |
$42.00 |
$25.00 |
|
Tax Rate |
35.00% |
$25.00% |
|
CapitalSpending |
$75.00 |
$40.00 |
|
WorkingCapital(as%ofRevenue) |
40.00% |
30.00% |
|
Beta |
1.45 |
1.25 |
|
ExpectedGrowth Rate in Revenues/EBIT |
25.00% |
15.00% |
|
ExpectedPeriod of High Growth |
10years |
10years |
|
GrowthrateAfterHigh-GrowthPeriod |
6.00% |
6.00% |
|
BetaAfterHigh-Growthperiod |
1.10 |
1.10 |
Capital spending will be offset by depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%.
a. Estimate the value of Novell, operating independently.
b. Estimate the value of WordPerfect, operating independently. c. Estimate the value of the combined firm, with no synergy.
d. As a result of the merger, the combined firm is expected to grow 24% a year for the high-growth period. Estimate the value of the combined firm with the higher growth.
e. Whatis thesynergyworth? Whatisthe maximumpriceNovell canpayfor WordPerfect?
