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 Don't use plagiarized sources. Get Your Custom Essay on what is the synergy worth what is the maximum price novell can pay for wordperfect 546347 For $10/Page 0nly | 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?
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