Question 22.4: At the time Sprint announced plans to acquire Nextel in Dece...
At the time Sprint announced plans to acquire Nextel in December 2004, Sprint stock was trading for $25 per share and Nextel stock was trading for $30 per share. If the projected synergies were $12 billion, and Nextel had 1.033 billion shares outstanding, what is the maximum exchange ratio Sprint could offer in a stock swap and still generate a positive NPV? What is the maximum cash offer Sprint could make?
PLAN
We can use Eq. 22.4 to compute the maximum shares Sprint could offer and still have a positive NPV. To compute the maximum cash offer, we can calculate the synergies per share and add that to Nextel’s current share price.
Exchange Ratio <\frac{P_T}{P_A}\left(1+\frac{S}{T} \right) (22.4)
Using Eq. 22.4,
Exchange Ratio <\frac{P_T}{P_A}\left(1+\frac{S}{T} \right) = \frac{30}{25}\left(1+\frac{12}{31}\right) = 1.665
That is, Sprint could offer up to 1.665 shares of Sprint stock for each share of Nextel stock and generate a positive NPV.
For a cash offer, given synergies of $12 billion/1.033 billion shares = $11.62 per share, Sprint could offer up to $30 + 11.62 = $41.62.
EVALUATE
Both the cash amount and the exchange offer ($25 × 1.665 = $41.62 ) have the same value. That value is the most that Nextel is worth to Sprint—if Sprint pays $41.62 for Nextel, it is paying full price plus paying Nextel shareholders for all the synergy gains created—leaving none for Sprint shareholders. Thus, at $41.62, buying Nextel is exactly a zero-NPV project.