Question

The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.1 million shares outstanding and its stock price is currently $40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for $58 per share in cash and the balance in a second offer of 800,000 convertible preferred stock shares. Each share of preferred stock would be valued at 50 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all Norton’s shares be made at $55.25 per share.

a. Calculate the total costs of the two alternatives. (Do not round intermediate calculations. Enter your answers in dollars, not millions (e.g., $123,456,000).)

	Total Costs
Two step offer
Single offer

b. Which is better in terms of minimizing costs?

• Two step offer

• Single offer

Answer 1

a. Two Step Offer Costs = First Step Cost + Second Step Cost

Two Step Offer Costs = Shares O/s * 51% * 58 + Preferred Shares Issued * Norton Share Price * (1 + 50%)

Two Step Offer Costs = 2100000 * 51% * 58 + 800000 * 40 * (1 + 50%)

Two Step Offer Costs = $110,118,000

Single Offer Costs = Shares O/s * Offer Price

Single Offer Costs = 2100000 * 55.25

Single Offer Costs = $116,025,000

b. Which is better in terms of minimizing costs?

Two step offer

Two step offer is best as it costs less than  single offer

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