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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?
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