Gary Swan Imports Inc. is located in Stratford, Ontario. Swan is the only company with reliable sources for its imported gifts. The company does a brisk business with specialty stores such as Bowring. Swan's recent success has made the company a prime target for a takeover. An investment group from Toronto is attempting to buy 51% of Swan's outstanding shares against the wishes of Swan's board of directors. Board members are convinced that the Toronto investors would sell the most desirable pieces of the business and leave little of value.
At the most recent board meeting, several suggestions were made to fight off the hostile takeover bid. The suggestion with the most promise is to repurchase a huge quantity of common shares. Swan has the cash to carry out this plan.
Requirement
Suppose you are a significant shareholder of Gary Swan Imports Inc. Write a memorandum to explain to the board how the repurchase of common shares would make it difficult for the Toronto group to take over Swan. Include in your memo a discussion of the effect that repurchasing common shares would have on shares outstanding and on the size of the corporation.