Question

The following are details from the fictional acquisition of Namco (a pool, and home pool table, company) by Fred’s Pools, both fictional public companies. Originally the Fred’s Pools began negotiations with Namco in good faith, but when talks broke down, Fred’s Pools approached Namco’s shareholder directly with the offer. Namco’s management had been upset from the very start as Fred’s Pool disclosed they had bought 3.5% of Namco’s shares before the deal was announced.

Pre-news of the deal, Namco’s stock price was $25. Fred’s first offer was for $32, but finally the deal closed at a price of $35. Namco’s management was not happy, but the premium offered was too high to reject – they could have argued that the original $32 was not adequate, but $35 was difficult to argue against – if offered $35, most shareholders would take this offer.

Fill in the blanks (show workings where necessary) or select the correct choice: This is an example of a (horizontal/vertical/conglomerate) deal. The deal began as (friendly/hostile) but turned (friendly/hostile) before it closed. The 3.5% stake acquired before the deal was announced is known as a ___________ purchase. The premium originally offered over the pre-deal price was __________________. The final premium over the pre-deal price was ___________________. Since the final offer was too good to reject, this was an example of a _________________, one of three hostile tactics commonly used.

Answer 1

This is an example of horizontal deal. The deal began as hostile but turned friendly before it closed. The 3.5% stake acquired before the deal was announced is known as a toehold purchase. The premium originally offered over the pre-deal price was $7. The final premium over the pre-deal price was $10. Since the final offer was too good to reject, this was an example of a tender offer, one of three hostile tactics commonly used.

Original premium - 32 - 25 = 7

Final premiuim 35 - 25 = 10