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?

Step by step solution

01

Calculation of two-step offer cost

The two-step offer cost is:

$\begin{array}{rcl}\mathbf{Two}\mathbf{-}\mathbf{step}\mathbf{}\mathbf{offer}\mathbf{}\mathbf{cost}& \mathbf{=}& \mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{51}\mathbf{\%}\mathbf{}\mathbf{shares}\mathbf{+}\mathbf{Cost}\mathbf{}\mathbf{Preference}\mathbf{}\mathbf{Shares}\\ & \mathbf{=}& \mathbf{\$}\mathbf{79}\mathbf{,}\mathbf{050}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{47}\mathbf{,}\mathbf{040}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{126}\mathbf{,}\mathbf{090}\mathbf{,}\mathbf{000}\end{array}$

02

Calculation of one-step offer cost

Single offer cost:

$\begin{array}{rcl}\mathbf{Single}\mathbf{}\mathbf{offer}\mathbf{}\mathbf{cost}& \mathbf{=}& \mathbf{Outstanding}\mathbf{}\mathbf{Shares}\mathbf{\times }\mathbf{Price}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\\ & \mathbf{=}& \mathbf{2}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{59}\mathbf{.}\mathbf{25}\\ & \mathbf{=}& \mathbf{\$}\mathbf{148}\mathbf{,}\mathbf{125}\mathbf{,}\mathbf{000}\end{array}$

The two-step offer is better in terms of minimizing costs.

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