Project #33069 - Economics

Firm 1 seeks to acquire firm 2 whose ulitmate dollar value is uncertain because of an ongoing liability issue.  The below table shows each firm's respective values ($M) conditioned upon the liability issue.  Note that Firms 1 and 2 have different continent values and probability assessments as to firm’s 1 liability. Both firms are considered risk neutral.

 

Not Liable

Liable

 

Value

Prob

Value

Prob

Firm 1

50

0.5

20

0.5

Firm 2

40

0.8

30

0.2

 

a.    Firm 1 is hoping to acquire Firm 2 in a 100% cash transaction.  Is a mutually beneficial 100% transaction possible?  Explain.

 

b.    Instead, suppose that Firm 1 considers acquiring Firm 2, paying all or in part with its own stock under the condition Firm 2 owners are prohibited from selling the stock for two years.  If Firm 1 acquires Firm 2 and subsequently Firm 2 is found liable, both sides expect the Firm 1 stock will fall by 50%.  Is a mutually beneficial 100% stock transaction possible?  Provide an example to show whether your answer is yes or no.

 

c.    The firms are considering a provision in the acquisition allowing Firm 2's senior managers (who will continue to work for the combined firm) to buy back at a predetermined price ownership of Firm 2 in the event it is found to be liable.  Does such a provision make sense?  Provide a qualitative answer. 

 

Subject Business
Due By (Pacific Time) 06/15/2014 12:00 am
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