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 35 %. 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

a. The shareholders will want to tender their shares.

c. The gain will be $25.31 million – $23.44 million = $1.87 million.

Step-by-step explanation:

a. The value of the firm is 1.25 million shares* 15= $18.75 million.

Increase in value, 18.75*135% = $25.31 million, so now this is the value of the firm

If 50% of the shares are bought for $18.75 Million, you will buy 0.625 million shares, so the total amount that will be paid is $11.72 million.

Now, the money against shares will be borrowed as collateral. This means that the new value of the equity will be $25.31 million – $11.72 million = 13.59 million.

1.25 million shares are there so now the price of the share will be = $10.87 million ($13.59 million/$1.25 million = $ 10.87 million).

b.The price of the shares has decreased from $13.59 to $10.87 after the tender offer, everyone will want to tender their shares for $18.75.

c. Supposing everyone tenders the shares and you will buy at $18.75 per share, you will pay $23.44 (18.75 per share *1.25 million shares) to acquire the company and it will be worth $25.31 million.

The gain will be $25.31 million – $23.44 million = $1.87 million.