Question

In: Finance

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company.​...

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?

Solutions

Expert Solution

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


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