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Chapter 5: Q12DQ. (page 648)

What is the purpose(s) of the two-step buyout from the viewpoint of the acquiring company?

Short Answer

Expert verified

To provide strong inducement to stockholders and pay the lower total price by the acquirer if a single offer is made.

Step by step solution

01

Explanation on two-step buyout

A two-step buyout is a purchasing plan in which acquiring company offers a higher price for 51% of the share outstanding, and also offers a second option of the lower price, which will be paid in the future by cash, shares, or bonds.

02

Purpose of two-step buyout

The purpose of a two-step buyout is as follows:

  • It induces stockholders to react to the offer made. If the stockholders do not take immediate action, they will have to accept a lower price.

Acquiring company can pay a lower price compared to a single offer.

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Most popular questions from this chapter

The postmerger P/E ratio can move in a direction opposite to that of the immediate postmerger earnings per share. Explain why this could happen

Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be \(4.00 with or without the merger. However, the standard deviation of the earnings will go from \)2.40 to $1.60 with the merger because the two firms are negatively correlated.

a.Compute the coefficient of variation for the Knight Corporation before and after the merger (consult Chapter 13 to review statistical concepts if necessary).

b.Discuss the possible impact on Knight’s postmerger P/E ratio, assuming investors are risk-averse.

What factors would influence a U.S. business firm to go overseas?

What is a letter of credit?

General Meters is considering two mergers. The first is with Firm A in its own

volatile industry, the auto speedometer industry, while the second is a merger

with Firm B in an industry that moves in the opposite direction (and will tend to

level out performance due to negative correlation).

General Meters Merger

with Firm A

General Meters Merger

with Firm B

Possible

Earnings

(\( in millions) Probability

Possible

Earnings

(\) in millions) Probability

\(40 ........... 0.30 \)40 ........... 0.25

60 ........... 0.40 60 ........... 0.50

80 ........... 0.30 80 ........... 0.25

aCompute the mean, standard deviation, and coefficient of variation for both

investments (refer to Chapter 13 if necessary).

b.Assuming investors are risk-averse, which alternative can be expected to

bring the higher valuation?
See all solutions

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