Question

1. The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $ 32 per​ share, and LE is trading for $65 per​ share, implying a​ pre-merger value of LE of approximately $ 8.6 billion. If the projected synergies are $1.04 ​billion, what is the maximum exchange ratio NFF could offer in a stock swap and still generate a positive​ NPV?

2. ABC has 11 million shares​ outstanding, each of which has a price of $23. It has made a takeover offer of XYZ Corporation which has 1 million shares​ outstanding, and a price per share of $ 2.43. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.

1. Assume ABC made a cash offer to purchase XYZ for $ 3.2 million. What happens to the price of ABC and XYZ on the​ announcement? What premium over the current market price does this offer​represent?
2. Assume ABC makes a stock offer with an exchange ratio of 0.14. What happens to the price of ABC and XYZ this​ time? What premium over the current market price does this offer​ represent?
3. At current market​ prices, both offers are offers to purchase XYZ for $3.2 Million. Does that mean that your answers to parts ​(a​) and ​(b​) must be​ identical? Explain.

3. You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company.​ UnderWater's stock price is $18 and it has 1.75 million shares outstanding. You believe that if you buy the company and replace its​ management, its value will increase by 44%. You are planning on doing a leveraged buyout of UnderWater and will offer $22.50 per share for control of the company.
   1. Assuming you get​ 50% control, what will happen to the price of​ non-tendered shares?
   2. Given the answer in part ​(a​), will shareholders tender their​ shares, not tender their​ shares, or be​ indifferent?
   3. What will your gain from the transaction​ be?

Answer 1

1). Number of LE shares = value of LE/price per share = 8,600,000,000/65 = 132,307,692.31

After merger, LE will be worth = pre-merger value + synergy = 8,600,000,000 + 1,040,000,000 = 9,640,000,000

Value per share after merger = 9,640,000/132,307,692.31 = 72.86

Thus, the maximum exchange ratio can be LE price/NFF price = 72.86/32 = 2.277

NFF can exchange, at the maximum, 2.277 shares for each share of LE.

2a). Cash offer of $3.2 million implies a price of $3.2 per share for XYZ.

This represents a premium of (3.2-2.43)/2.43 = 31.69%

At announcement, XYZ price will go upto $3.2 per share whereas ABC price will be current price - premium offered*current price of XYZ = 23 - 31.69%*2.43 = $22.23

b). ABC price will be price of the merged entity.

Share price of the merged entity = total price/total exchange ratio = (23+2.43)/(1+0.14) = 22.31

XYZ price = 0.14*share price of ABC after merger = 0.14*22.31 = $3.12

This represents a premium of (3.12-2.43)/2.43 = 28.52%

c). Answers to parts (a) and (b) will not be identical because the premium for a stock offer will be lower as ABC is paying less premium to XYZ. This is reflected in the change in market prices as ABC price goes up to reflect the premium and the XYZ price decreases.

3a). Value of the company is current value + increase in value = (18*1.75) + 44%*(18*1.75) = 45.36 million

Now, 50% of the company is bought for $22.50 per share so total price offered = 50%*1.75*22.50 = 19.69 million

This rice will be taken as debt so new equity value of the company = 45.36 - 19.69 = 25.67 million

Price per share = 25.67/1.75 = $14.67

The price of non-tendered shares will fall from $18 to $14.67.

3b). If share price is going to fall to $14.67 then shareholders will tender their shares at the offer price of $22.50.

3c). If the entire company is bought then total price paid will be 1.75*22.50 = 39.38 million

The company value is 45.36 million, so gain will be 45.36 - 39.38 = 5.99 million.