Question

An entrepreneur founded a company (ABC) in 2001. Recently, the stock was trading at $41per share. With 850k shares outstanding, EPS were $1.41. The entrepreneur and the members of the board of directors were initially pleased when another firm purchased 50k shares of ABC stock. However, when the purchasing firm bought another 50k shares, the entrepreneur and members of the board became concerned that the purchasing firm might be trying to take over ABC The entrepreneur was reminded by the legal staff that ABC had a poison pill provision that took effect when any outside investor accumulated 20% or more of the shares outstanding. Current stockholders, excluding the potential takeover company, were given the privilege of buying up to 500k shares of ABC at 84.81% of current market value. Thus, new shares would be restricted to friendly interests. The legal staff also found that the entrepreneur and "friendly" members of the board currently owned 175k shares of ABC. In view of the above information, ABC company is in the process of determining the costs described by the following scenarios: Scenario #1: Takeover firm makes a move Gets 50% (plus 1 share) of ABC stock at the current market price level in addition to shares previously accumulated. Scenario #2: "Friendly" shareholders come to the rescue Takeover firm exceeds the number of shares determined in the previous scenario, and gets all the way up to 625,000 shares of ABC. Under the poison pill provision, friendly shareholders purchase to prevent a takeover attempt by the acquiring firm, next to what they already own.

Answer 1

Given:
Stock price = $41 per share
Share outstanding = 850k
EPS = $1.41
Shares acquired by purchasing firm = 50k + 50k = 100k
Shares acquired by the board members = 175k.
Scenario # 1
Takeover firm acquires ( 50% of 850k + 1 share) = 425,001 shares
Cost of acquisition = (425,001 * $41) = $17,425,041
Cost of Purchase of first 50k shares =( 50,000 * $41) = $2,050,000
Cost of Purchase of Second 50k shares =( 50,000 * $41) = $2,050,000
Total Cost = ($17,425,041 + $2,050,000 + $2,050,000) = $21,525,041
Scenario # 2
In this case, Takeover firm acquires 625,000 shares
= (625,000 * $41) = $25,625,000
Shares acquired by Present   shareholders = (850k - 625k - 175k) = 50k
= [50,000 * ($41 *84.81% )] = (50,000 * $34.77) = $1,738,500
Total Cost = ( $25,625,000 + $1,738,500) =   $27,363,500
The Poison pill strategy makes the purchase expensive forTakeover firm by 20.45%
working Note:
= [ 25,625,000 + $311,500 - $21,525,041] = $4,411,459
where, [$311,500 = 50,000 shares * ($41-$34.77) ]
= $4,411,459 / $21,575,041 *100 = 20.45%