Carla is the CEO of The Superior Sausage Company (a Canadian firm, listed on the Toronto Stock Exchange) and believes that the best way for the company to grow is through acquisitions. She has identified a likely target, Bunns & Bagels (B&B), which is also listed on the Toronto Stock Exchange.
a. Describe two different possible types of motives for this acquisition.
b. Carla is very uncertain about the value of B&B. Describe how she can structure the deal to reduce the risk to Superior Sausage.
c. Carla has just publicly announced that she feels that the senior management of B&B is not only incompetent, but likely to have been committing fraud.
i. Is a takeover by Superior Sausage more likely to be friendly or hostile? Why?
ii. Is Superior more likely to use a tender offer or a merger offer? Why?
iii. Describe three ways B&B could try to defend itself from Superior.
d. Before the market opened on Monday, B&B announced that it had received a merger offer from Franks’ Fine Franks. By the end of trading on Monday, B&B has earned a return of – 2 percent (negative 2 percent). The return on the market that day was 4 percent and the daily risk-free rate was close to zero. The beta for B&B is 2, with a standard deviation of the regression of 2 percent.
i. What is the expected return for B&B on Monday based on CAPM?
ii. What is the abnormal return for B&B on Monday?
iii. Given the empirical evidence on mergers and acquisitions, is the market’s reaction unusual? Why or why not?