In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information about the two companies was as follows:
|
Revenues |
Novell |
WordPerfect |
|
Cost of Goods Sold (w/o Depreciation) |
$1,200.00 |
$600.00 |
|
Depreciation |
57.00% |
75.00% |
|
Tax Rate |
$42.00 |
$25.00 |
|
Capital Spending |
35.00% |
35.00% |
|
Working Capital (as % of Revenue) |
$75.00 |
$40.00 |
|
Beta |
40.00% |
30.00% |
|
Expected Growth Rate in Revenues/EBIT |
1.45 |
1.25 |
|
Expected Period of High Growth |
25.00% |
15.00% |
|
Growth rate After High-Growth Period |
10 years |
10 years |
|
Beta After High-Growth period |
6.00% |
6.00% |
|
1.1 |
1.1 |
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. What is the synergy worth? What is the maximum price Novell can pay for WordPerfect?