UnderCo has 10M shares outstanding with shares trading at $8/share. One day UnderCo is targeted by a
Question:
UnderCo has 10M shares outstanding with shares trading at $8/share. One day UnderCo is targeted by a hostile tender offer for $9/share.
UnderCo's management owns 40% of the firm, and will not sell its shares. In order to fend off the bid, management plans to make a competing tender offer to public investors. The company will borrow $30M and use the proceeds to finance the self-tender.
UnderCo is initially 100% equity financed.
UnderCo faces a corporate tax rate of 50%. Assume UnderCo maintains the level of debt, and that interest tax shields are as risky as the debt.
a) Assume UnderCo announces an offer for $9.20/share. This would be a partial tender offer, the size of which is limited by the amount of debt proceeds. Will shareholders tender? Explain using numbers. (Hint: First compute how much the company is worth after borrowing $30M and using it all to buy back shares. Now compute the price of non-tendered shares assuming the bid is successful and compare it with the tender offer)
b) If UnderCo offers $10, will shareholders tender? Explain using numbers.
c) Can the self-tender offer in (b) successfully fend off the hostile takeover?
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts