Question

Recently the pharmaceutical company Mylan attempted a hostile takeover of generic drugmaker Perrigo. Perrigo reported a net loss the year before the attempted takeover, which was partially driven by a spike in administrative expenses. Suppose that Mylan perceives there is a 70 percent probability that Perrigo’s loss is merely the transitory result of administrative expenses needed to fight the takeover. In this case, the present value of Perrigo’s stream of profits is $30 billion. However, Mylan perceives that there is a 30 percent chance that Perrigo’s net loss stems from long-term structural changes in the demand for Perrigo’s services, and that the present value of its profit stream is only $6 billion.

You are a decision-maker at Mylan and know that your current takeover bid is $21 billion. You have just learned that a rival bidder – Abbott Laboratories – perceives that there is an 80 percent probability that the present value of Perrigo’s stream of profits is $30 billion and a 20 percent probability of being only $6 billion.

Based on this information, should you increase your bid or hold firm to your $21 billion offer?

Answer 1

Solution

Here it is given that Mylan has attempted a hostile take over of Perrigo

Mylan perceives that Perrigo's loss is due to 2 different reasons and the probability of the 2 reasons are also different.Also Each reason results in a different present value of profits of Perrigo

Note: Any company is valued based on it's present value of future profits.

Reason 1 - due transitory result of administrative expenses needed to fight the takeover

Reason 2 - due long-term structural changes in the demand for Perrigo’s services

Expected value of the present value is obtained by considering both the situations

= ( (.70) * 30) + ( (.30) * 6)

= 21+1.8 i.e.,$22.80 Billion

Given that Mylan's takeover bid is $21 Billion but the present value of Perrigo is $22.80 Billion

Abott's Valuation

( (.80) * 30) + ( (.20) * 6)

= $25.20 Billion

The takeover bid rate of Abott is not given. But definitely there is a high probability that it will place it's bid above that of Mylan because it's perceived value itself is $25.20 Billion.

So,Mylan should increase the bid from it's existing offer of $21 Billion. It's bid rate can go up to $22.80 Billion to improve it's chances of takeover.