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What is the synergy worth? What is the maximum price Novell can pay for WordPerfect?

$7.00

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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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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