In: Finance
You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater's stock price is $ 23 and it has 2.25 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 38 %. You are planning on doing a leveraged buyout of UnderWater and will offer $ 28.75 per share for control of the company. a. Assuming you get 50% control, what will happen to the price of non-tendered shares? b. Given the answer in part (a), will shareholders tender their shares, not tender their shares, or be indifferent? c. What will your gain from the transaction be?
A) company value before merging = 2.25 millions * 23 = $ 51.75 million.
If you buy the company & replace the management then value increases by 38%.
New company value =$ 51.75 million * 138% =$ 71.415 million.
If you buy 50% of shares @ $ 28.75, then you will get 1.125 millions shares & you will pay 1.125million shares * 28.75 = 32.344 million.
You will borrow this money by pledging the shares as a collateral, and then assign the loan to company once You have control.
This means the new equity value =$ 71.415 - $ 32.344 = $ 39.071 million .
Now the share price will be = $ 39.071 million / 2.25 million = $ 17.365 per share.
B) The price of the share will decrease from 23 to 17.365 per share after tender offers, every one will want to offer a share from $28.75 per share.
C) if suppose everyone tenders the shares and you wil buy At 28.75 per share . You will pay 2.25 millions * 28.75 = $64.6875. millions
You will confident the company will become to increase by 38% after replacing the management value will be = $ 71.415 million
Gain = $ 71.415 million - $ 64.6875 million = $ 6.7275 millions