Question

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company.​ UnderWater's stock price is $ 15 and it has 1.25 million shares outstanding.You believe that if you buy the company and replace its​ management, its value will increase by 43 %. You are planning on doing a leveraged buyout of UnderWater and will offer $ 18.75 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?

Answer 1

Answer : a.) Price of Untendered Shares is $ 12.075

b.) Shareholders will tender their shares

c.) Total Gain will be $ 3.375 Million

For detailed calculation refer below:-->

a.) Calculation of the price of Non tendered Shares

Given the following information :

Stock Price = $15

Number of Outstanding Shares = 1.25 Million

Increase in Value = 43%

Offer Price = $ 18.75 per share

Calculation of the value of the firm after increase

Value of the firm should be calculated after increasing its value as it is given that by buying the comapany and replacing its management there will be increase in the value of firm

Therefore ,

Value of Company = (No. of shares outstanding * Stock Price ) + (Number of the shares outstanding * Stock Price * Increse in Value)

Value of Company = (1.25 Million * $ 15 ) + (1.25 Million * $ 15 * 43 %)

= 18.75Million + 8.0625 Million

Therefore Value of Company = $ 26.8125 Million

If Company  buys 50% of the shares for $ 18.75  per share

Number of the shares to buy = 1.25 Million * 50 %

= 0.625 Million shares

Purchase Price will be (0.625 Million * $ 18.75 per share) $ 11.71875

As it's Leveraged Buyout We need to borrow this money, pledging the shares as collateral and then assign the loan to the company once you have control. Leverage buyout refers to the purchase of another company’s asset using the borrowed capital.

New value of the equity = $ 26.8125 million – $11.71875 million in debt

= $15.09375.

Price of Untendered Shares = New Value of Equity / No. of shares outstanding

= 15.09375 / 1.25

= $ 12.075

b. ) As the price of the shares will drop from $ 15 to $12.075 after the tender offer,shareholders will be ready to tender their shares for $ 18.75.

c.) Calculation of Gain from above Transaction

Assuming that every shareholder is ready to tenders their shares

Total Price to be paid by the company = 1.25 Million * $ 18.75 per share

= $ 23.4375 Million

This $ 23.4375 Million will be worth $26.8125 million.

Now the company will own 100 % of the equity

Therefore Total Gain will be( $26.8125 Million - $ 23.4375 Million loan to buy shares) $ 3.375 Million