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ABC has 1 million shares​ outstanding, each of which has a price of $ 23. It...

ABC has 1 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 $ 2.55. Assume that the takeover will occur with certainty and all market participants know this.​ Furthermore, there are no synergies to merging the two firms. a. Assume ABC made a cash offer to purchase XYZ for $ 3.1 million. What happens to the price of ABC and XYZ on the​ announcement? What premium over the current market price does this offer​ represent? b. Assume ABC makes a stock offer with an exchange ratio of 0.13. What happens to the price of ABC and XYZ this​ time? What premium over the current market price does this offer​ represent? c. At current market​ prices, both offers are offers to purchase XYZ for $ 3.1 million. Does that mean that your answers to parts ​(a​) and ​(b​) must be​ identical? Explain.

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Expert Solution

Answer : (a.) Calculation of Price of ABC and XYZ Corporation on announcement

Given

Shares outstanding of XYZ = 1 million shares

Offer Price = $ 3.1 million

Old share price = $2.55

Share Price of XYZ Corporation = Offer Price / Shares Outstanding

= 3.1 million / 1 million

= $ 3.1

Calculation of Amount of Premium

Premium = (New Price - Old Price ) / Old Price

= (3.1 - 2.55) / 2.55

= 0.2157 or 21.57%

Calculation of Share Price of ABC Corporation

Share Price of ABC Corporation = Old Price - (Premium * 2.55)

= 23 - (21.57% * 2.55)

= 23 - 0.55

= $22.45

(b.) Calculation of Price of XYZ and ABC in case of Stock offer

Price of Combined Entity = 23 + 2.55

= 25.55

Exchange Ratio = 0.13 : 1

ABC price = price of combine entity / Exchange Ratio

= 25.55 / 1.13

= $ 22.6106

XYZ price = Amount that shareholders will receive

= 0.13 × $22.6106

= $2.9394

Premium = 2.9394 - 2.55 /2.55

= 15.27% premium

(c.) Part ​(a​) and ​(b​) cannot be​ identical as the premium in the stock offer is lower because market prices change to reflect the fact that ABC Coporation shareholders are giving money to XYZ Corporation shareholders because they are paying a premium. The part (b) announcement means XYZ stock goes up and ABC stock goes down, which reduces the premium relative to the cash offer.

jeff jeffy answered 1 year ago
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