Question

Bad company's stock price is $35, and it has 2.0 million shares outstanding. You believe that if you buy the company and replace its management its value will increase by 16%. Assume that Bad has a poison pill with a 20% triggered all target shareholders-other than the acquirer-will be able to buy one new share in Bad for each share they own as an 80% discount? Assume that the price remains at 35 while you are acquiring your shares. If Bad's management decides to resist your buyout attempt you cross the 20% threshold of ownership.

A. how many new shares will be issued and at what price?

B. What will happen to your percentage ownership of Bad?

C. What will happen to the price of your shares of Bad?

D. Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who benefits)? If you gain, where does the gain come from (who loses)?

E. Every other shareholder in the target firm gains________ per share?

Answer 1

A poison pill is a strategy used by the target company to save themselves from a hostile takeover where the company gives is existing shareholder shares ata discounted price to dilute the holdings of the aquirer in the company.

A. Total no of shares for Bad Ltd = 2M

No of shares held by Aquirer = 20% of 2 M = .4 M

No of shares held by other shareholders = 2 - .4 = 1.6

No of shares issued will be = 1/2 of 1.6 M

                                           = .8 M

price at which shares will be sold = 35 - 35 *80% = 35 - 28 = My

B My percentage ownership of Bad = my share / total no of shares

                                                         = .4 / 2 + .8

                                                         = .4/2.8 = 14.29 %

C. The price of the shares will drop after the poison pill happens as there are higher number of shares for which the company has not received full value.

D. If poison pill is triggered i will lose as the value of share will decline if new shares are issues at a discounted price. Also the percentage of shares held by me will dilute and it wont be any longer a lucrative takeover.

The other shareholder will gain as they are getting extra shares at a discounted price.Which increases their holding in the company.