The management of Webster Labs decided to go private in 2003 by buying all 3 million outstanding shares at $18.50 per share. By 2005, management had restructured the company by selling the petroleum research division for $16 million, the fibre technology division for $9.5 million, and the synthetic products division for $20 million.
Because these divisions had been only marginally profitable, Webster Labs is a stronger company after the restructuring. Webster Labs is now able to concentrate exclusively on the contract research and will generate earnings per share of $1.50 this year. Investment dealers have contacted the firm and indicated that, if it returned to the public market, the 3 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 14 times earnings per share.
a. What was the initial total cost to Webster Labs to go private?
b. What is the total value to the company from
(1) The proceeds of the divisions that were sold,
(2) The current value of the 3 million shares (based on current earnings and an anticipated P/E of 14)?
c. What is the percentage return to the management of Webster Labs from the restructuring? Use answers from parts a and b to determine this value.