Question

It is June 30, 2020, and Blackstone has just announced its acquisition of Panera Bread ("PB"), a quick-service food establishment, in a leveraged buyout. You've been able to obtain the following stock market data on the takeover. First, the α and β of PB's stock prior to the window period were estimated to be -0.01 and 1.2, respectively. (Please note that α is measured on a monthly basis, so an α of -0.01 indicates an abnormal return of -1% per month.) The market began anticipating a takeover on the 1st of April. Since then, the monthly excess returns on PB and the market have been as follows. April: PB return of 0.20 (20%), market return of 0.10 (10%). May: PB return of 0.156, market return of 0.08. June: PB return of 0.156, market return of -0.02. You may assume that Blackstone announced its acquisition of PB on the last day of June (so the monthly return for June includes the announcement-day return). Note that all returns are given as excess returns, so you do not need to know the risk-free rate in order to answer this question.

Please calculate the premium that Blackstone paid in order to acquire PB.

Answer 1

The cost of the merger is the premium that the buyer pays over the seller's stand-alone value. However, if investors expect A to acquire B, the market value of B may overstate its stand-alone value.

Expected returns = β*Market returns

Excess returns + Expected returns = Actual stock returns

Acquisition premium = [(Ending actual stock price)May - (Ending true stock price)May]/(Ending true stock price)May

	β	1.2
Month	Market return	Expected stock return	Excess return	Actual stock return	Beginning true stock price	Ending true stock price	Beginning actual stock price	Ending actual stock price
April	10%	12%	20%	32%	100	112	100	132
May	8%	9.6%	15.6%	25.2%	112	122.75	132	165.26
June	-2%	-2.4%	15.6%	13.2%	122.75	119.81	165.26	187.08

Acquisition premium = (187.08 - 119.81)/119.81 = 56.15%