Verity Insurance Acquires a Rival: Accretive or Not?
Finance
medium55 min0 submissionsRazorpay
Scenario
Verity Insurance (insurance, US) is considering acquiring a smaller competitor.
Acquirer. Net income of $98 M, 118 million shares outstanding, trading at $79 per share. Current EPS is therefore $0.83.
Target. Net income of $28 M, currently valued by the market at $1028 M. The board expects to pay a 43% premium to that price.
Management projects $45 M of annual run-rate synergies, roughly 67% 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 $66 M.
The deal would be financed with debt at 6.5%. The marginal tax rate is 25%.
Supporting data
deal
- tax rate pct
- 25
- debt rate pct
- 6.5
- integration cost m
- 66
- run rate synergies m
- 45
target
- premium pct
- 43
- net income m
- 28
- market value m
- 1028
acquirer
- eps
- 0.83
- share price
- 79
- net income m
- 98
- shares outstanding
- 118
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.
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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.