Solstice Travel Acquires a Rival: Accretive or Not?
Finance
medium55 min0 submissionsFlipkart
Scenario
Solstice Travel (online travel, Southeast Asia) is considering acquiring a smaller competitor.
Acquirer. Net income of $137 M, 112 million shares outstanding, trading at $58 per share. Current EPS is therefore $1.22.
Target. Net income of $58 M, currently valued by the market at $567 M. The board expects to pay a 36% premium to that price.
Management projects $56 M of annual run-rate synergies, roughly 65% of which are cost synergies from overlapping sales and back-office functions, with the remainder from cross-selling. One-time integration costs are estimated at $48 M.
The deal would be financed with debt at 6.8%. The marginal tax rate is 25%.
Supporting data
deal
- tax rate pct
- 25
- debt rate pct
- 6.8
- integration cost m
- 48
- run rate synergies m
- 56
target
- premium pct
- 36
- net income m
- 58
- market value m
- 567
acquirer
- eps
- 1.22
- share price
- 58
- net income m
- 137
- shares outstanding
- 112
Your task
Advise the board on whether to proceed. Provide:
- Analysis — accretion/dilution to EPS in year one and at full synergy run-rate.
- Risks — what would make this deal destroy value.
- Recommendation — proceed, renegotiate, or walk. Specify price and structure.
Ready to move forward? Up next: Halcyon Bank: Can We Raise Prices 16%?Next question
How you'll be graded
100 points, 60% to pass.
- deal analysis25
- recommendation25
- risk assessment25
- synergy assessment25
Hint
Reveal suggested structure
- Purchase price = market value × (1 + premium).
- Financing cost = purchase price × debt rate, then after tax.
- Combined earnings = acquirer + target + after-tax synergies − after-tax interest.
- Combined EPS = combined earnings ÷ share count (unchanged in an all-cash deal).
- Compare against standalone EPS. Do this for year 1 (partial synergies, integration costs) and steady state.
- Sanity check the price against the target's standalone value.