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Question 2 – Mergers and Acquisitions ABC has 1 million shares outstanding, each of which has...

Question 2 – Mergers and Acquisitions

ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding and a price per share of $2.50. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.

Required:

Assume ABC made a cash offer to purchase XYZ for $3 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent?
Assume ABC makes a stock offer with an exchange ratio of 0.15. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?
At current market prices, both offers are offers to purchase XYZ for $3 million. Does that mean that your answers to requirements (1) and (2) must be identical? Explain.

Expert Solution

1. Price of XYZ Corporation = Value offered by ABC Company = $3 Million

Premium Over Current Market Price = ((Value Offered / Shares O/s) /Market Price) - 1

Premium Over Current Market Price = (($3 Million / 1 Million) /$2.50) - 1

Premium Over Current Market Price = 20%

Price of ABC after Conversion = Market Value of ABC + Market Value of XYZ = $20 Million + $2.5 Million = $22.50 Million

Price per share = (Market Value after Announcement - Cash value Paid) / Shares O/s

Price per share = ($22.50 Million - $3 Million) / 1 Million

Price per share = $19.50

2. Price of ABC Share = Market Value after announcement * ABC Share / (Total Share * Shares of ABC)

Price of ABC Share = $22.50 Million * 1 / 1.15 * 1 Million

Price of ABC Share = $19.57 Per Share

Price of XYZ Share = Market Value after announcement * XYZ Share / (Total Share * Shares of XYZ)

Price of XYZ Share = $22.50 Million * 0.15 / 1.15 * 1 Million

Price of XYZ Share = $2.93 Per Share

Premium = $2.93 / $2.50 - 1 =17.39%

3. No, The Premium in Stock offer is different from premium in Cash Offer due to difference in market price and because of offering cash and stock at a premium then they actually worth.

ekkarill92 answered 5 months ago

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