Corporate Finance

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THE BIRDIE GOLF-HYBRID GOLF MERGER – CASE

CORPORATE FINANCE

Birdie Golf, Inc, has been in merger talks with Hybrid Golf company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $550 million for hybrid Golf. Both companies have niche markets in the golf club industry, and both believe that a merger will result in synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses. Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger negotiations. Bryce has prepared the following pro forma financial statements for Hybrid Golf assuming the merger takes place. The financial statements include all synergistic benefits from the mergers.

| 2010 | 2011 | 2012 | 2013 | 2014 |

SALES | $800,000,000 | $900,000,000 | $1,000,000,000 | $1,125,000,000 | 1,250,000,000 |

PRODUCTION COSTS | 562,000,000 | 630,000,000 | 700,000,000 | 790,000,000 | 875,000,000 |

DEPRECIATION | 75,000,000 | 80,000,000 | 82,000,000 | 83,000,000 | 83,000,000 |

OTHER EXPENSES | 80,000,000 | 90,000,000 | 100,000,000 | 113,000,000 | 125,000,000 |

EBIT | $83,000,000 | $100,000,000 | 118,000,000 | 139,000,000 | 167,000,000 |

INTEREST | 19,000,000 | 22,000,000 | 24,000,000 | 25,000,000 | 27,000,000 |

TAXABLE INCOME | $64,000,000 | $78,000,000 | 94,000,000 | 114,000,000 | 140,000,000 |

TAXES (40%) | 25,600,000 | 31,200,000 | 37,600,000 | 45,600,000 | 56,000,000 |

NET INCOME | $38,400,000 | 46,800,000 | 56,400,000 | 68,400,000 | 84,000,000 |

Additions to retained earnings | 0 | $34,000,000 | $27,000,000 | 27,000,000 | 25,000,000 |

If Birdie Golf buys Hybrid Golf, an immediate dividend of $150 million would be paid from Hybrid Golf to Birdie. Stock in Birdie Golf currently sells for $94 per share, and the company has 8 million shares of stock outstanding. Both...