The firm Amble is entirely financed by equity. It has 4 million shares and a current share
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The firm Amble is entirely financed by equity. It has 4 million shares and a current share price of $8. It is public knowledge that the firm’s current management is inefficient and the firm’s share price would be $11 if well managed. Amble’s shares are owned entirely by small shareholders. The administrative costs to acquire Amble would be $0.14 million. An acquirer can gain control of the firm and manage it efficiently if they can purchase at least 51% of its shares. Assume the market is semi-strong form efficient.
- Lawson, an entrepreneur, can secretly buy 5% of Amble’s shares at the current market price, then make a public bid for a further 46% of the total number of shares at $11 each. What is Lawson's profit? Will the takeover go ahead? Explain.
- Assume that Lawson implements the strategy described in part (a). Amble has made a provision that when a potential acquirer reaches a holding of 16% of its shares, all shareholders except the acquirer will be able to buy one new share in Amble for each share they own at a 40% discount off the current market price. The market believes that Lawson will take control and you can assume a current market price of $11 to start with.
- How many new shares will be issued?
- After the provision has been triggered, what will be the market price of a share in Amble? What will be the value of Lawson’s shareholding in Amble?
Related Book For
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin
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