Reference no: EM132944975
Question - The firm Amble is entirely financed by equity. It has 4 million shares and a current share price of $8. It is public knowledge that the firm's current management is inefficient and the firm's share price would be $11 if well managed. Amble's shares are owned entirely by small shareholders. The administrative costs to acquire Amble would be $0.14 million. An acquirer can gain control of the firm and manage it efficiently if they can purchase at least 51% of its shares. Assume the market is semi-strong form efficient.
a) Lawson, an entrepreneur, can secretly buy 5% of Amble's shares at the current market price, then make a public bid for a further 46% of the total number of shares at $11 each. What is Lawson's profit? Will the takeover go ahead? Explain.
b) Assume that Lawson implements the strategy described in part (a). Amble has made a provision that when a potential acquirer reaches a holding of 16% of its shares, all shareholders except the acquirer will be able to buy one new share in Amble for each share they own at a 40% discount off the current market price. The market believes that Lawson will take control and you can assume a current market price of $11 to start with.
(i) How many new shares will be issued?
(ii) After the provision has been triggered, what will be the market price of a share in Amble? What will be the value of Lawson's shareholding in Amble?
(iii) Will the takeover go ahead? Explain.
c) Identify and briefly explain an alternative strategy Lawson might use to implement an efficient takeover of Amble.
d) How might the existence of a large shareholder potentially affect a firm's market value? Explain.
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