Choose either problem 1 or 2
Problem 1 (50 points)
Buyer announced its intention to acquire Target in an all-cash bid on 1st July 2015. The market did not know about the deal until the deal was announced. The price of Target on 30th June 2015 was £60, while the price of Buyer was £100. The current price of Target is £70. Buyer is offering a cash bid of £80 per share of Target. The deal is expected to close in exactly nine months. The (annual) risk-free rate is 3% and the discount rate is 6%.
- What is the market’s current assessment of the probability that the deal will be completed?
Now suppose that an analyst at your firm tells you that rumors on a possible takeover of Target had started on New Year’s Eve, when the two CEOs of Buyer and Target were seen partying together. On 1st of January the price of Target was £50 and its equity beta 1.1. The price of the market index on 1st January was 1,000 and on 30th June was 1,100 and its (annualized) dividend yield 2%. Assume Target does not pay dividends.
- Calculate the Premium in value per share and in percentage.
Problem 2 (50 points)
Company A plc intends to acquire company B plc by a takeover by shares or cash purchase. The takeover will enable post-tax synergies (with present value) of $5bn to be achieved. The companies are unlevered and they do not have any common transaction.
• The pre-bid valuations of A and B are detailed: