On January 3 rd , 2019, Bristol Myers Squibb agreed to buy Celgene. The deal calls for
Question:
On January 3rd, 2019, Bristol Myers Squibb agreed to buy Celgene. The deal calls for Celgene stockholders to receive $50 per share in cash plus one share of Bristol Myers Squibb stock for each share of Celgene stock. Celgene stock had been trading at $65 pre-merger but jumped to $90 per share after the merger announcement[1]. Bristol Myers Squibb has been trading at $50 per share since the merger was announced.
John Simpleton owns Celgene stock in his Keep-It-Simple High Growth portfolio. However, the fund's prospectus will not allow him to hold Bristol Myers Squibb stock because it is not considered a legitimate high growth stock. Therefore, he can sell his Celgene stock now for $90 or hold it until right before the merger, hoping it will appreciate, and then sell it[2]. Either way, he will avoid holding any Bristol Myers Squibb stock.
If he holds it until right before the merger, he runs the risk the deal is rejected by US regulators or derailed by activist investors. John estimates there is currently a 20% chance (.20 probability) that the deal is not completed. If that happens, then the stock price would fall precipitously, but due to the 2.2 billion break-up fee, John estimates Celgene's share price would not fall to its pre-merger price. Instead, it would fall to either $70 per share or $75 per share with equal probabilities. If the merger is completed, then John estimates Bristol Myers Squibb's stock price on merger day will either increase 10% (from its current $50 price) with probability .20, stay the same with probability .3, or decrease 10% with probability .50.
What can John expect to get for his Celgene stock? Draw the decision tree and indicate the correct course of action at each decision node, the expected value at each chance node, and Sam's (overall) expected payoff for selling his tickets.
[1]There is also a contingent value rights (CVR) that would pay CELGENE holders $9 per share if three drugs currently undergoing Phase III clinical trials are approved by the FDA. These rights are worth $0 to John Simpleton.
[2]If the merger is approved, the price of Celgene stock will equal the price of Bristol Myers Squibb stock plus $50 as the merger date approaches.
Expert Answer:
To determine the expected payoff for John Simpletons Celgene stock we can create a decision tree and ... View the full answer
