You own 100 shares of Target, Inc., whose current stock price is $14 per share (which correctly
Question:
You own 100 shares of Target, Inc., whose current stock price is $14 per share (which correctly reflects the firm's stand-alone value). Target has 100M shares outstanding. Raider, Inc. has just made a two-tier tender offer for Target's shares. Raider has offered $20 per share for up to 60% of Target's shares in the first tier, and $17 per share for the remaining shares in the second tier. You expect Target's shares to be worth $19 per share if Raider takes control. If Raider gets more than 50% ownership in the first tier, it can force a "back-end" merger where all remaining shareholders are forced to accept $17 per share even if they do not tender into the second tier. a. If you expect 80% of Target's shares to be tendered into the first tier, what is your expected payoff (i.e., the total value you will receive in the takeover) if you tender all of your shares in the first tier, and then (after the first tier is executed) you tender any remaining shares you own in the second tier? b. Write out a decision matrix showing whether you should tender your shares in the first tier if you assume that there will be no future bids if Raider fails (i.e., if less than 50% of the shares are acquired in the first tier, and Raider acquires no more shares). Continue to assume that 80% of Target's shares are tendered if the deal is successful. c. Now write out a similar decision matrix under the assumption that if Raider fails to acquire 50% in the first tier, there is a 75% probability another acquirer will come along and agree to a friendly merger with Target at $25 per share. Continue to assume that 80% of Target's shares are tendered if the deal is successful.
How should you make your tendering decision in this case?
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri