Name three industries in which mergers have been prominent
Airlines, telecommunications, and banking
A merger is a business activity in which two or more companies combine together and run in the name of the acquiring company.
The airline industry refers to the group of companies that are engaged in air transportation business.
The telecommunication industry refers to the group of companies that are engaged in services such as satellite service, internet service, telephone services, etc.
The banking industry refers to the group of companies that are engaged in the business of payment, cash receipts and checks, and provide financial services to consumers.
The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.5 million shares outstanding and its stock price is currently $40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for $62 per share in cash and the balance in a second offer of 840,000 convertible preferred stock shares. Each share of preferred stock would be valued at 40 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all Norton’s shares be made at $59.25 per share. Compare the total costs of the two alternatives. Which is better in terms of minimizing costs?
Chicago Savings Corp. is planning to make an offer for Ernie’s Bank & Trust. The stock of Ernie’s Bank & Trust is currently selling for $44 a share.
a. If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie’s Bank & Trust?
b. Suppose before the offer is actually announced, the stock price of Ernie’s Bank & Trust goes to $60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?
c. Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at $60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?
d. If there is an 80 percent probability that the merger will go through when you buy the stock at $60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.
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