1. Which strategy works best if a bidding war erupts?

2. Which strategy works best if the hostile takeover is defeated?

3. Which strategy works best if the original offer price becomes the final price?

4. Which of the three positions produces the worst result and under what condition does it occur?

5. If you were Herrara’s financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?

Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Mid-West Airlines has become the target of a hostile takeover. Prior to the announcement of the offer to purchase the stock for $72 a share, the stock had been selling for $59. Immediately after the offer, the stock rose to $75, a premium over the offer price. Such premiums are often indicative that investors expect a higher price to be forthcoming. Such a higher price could occur if a bidding war erupts for the company or if management leads an employee or management buyout of the firm. Of course, if neither of these scenarios occurs, the price of the stock could fall back to the $72 offer price. In addition, if the offer were to be withdrawn or defeated by management, the price of the stock could fall below the original stock price.