Question

1. BAD Company’s stock price is $30, and it has 2 million shares outstanding. You believe you can increase the company’s value if you buy it and replace the management. Assume that BAD has a poison pill with a 15% trigger. If it is triggered, all BAD’s shareholders—other than the acquirer—will be able to buy one new share in BAD for each share they own at an 80% discount. Assume that the price remains at $30 while you are acquiring your shares. If BAD’s management decides to resist your buyout attempt and you cross the 15% threshold of ownership:

a.   How many new shares will be issued and at what price?

b.   What will happen to your percentage ownership of BAD?

c.   What will happen to the price of your shares of BAD?

d.   Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who benefits)? If you gain, from where does the gain come (who loses)?

Answer 1

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Answer:

a)

Number of shares issued = (1-15%) * 2Mn = 1.7 Mn

Price = 30 (1-0.8) = $6

b)

Percent of ownership = shares by acquirer.(old shares + new shares)

= 0.15*2Mn/(2Mn + 1.7Mn) = 8.1%

c)

New stock price = Price before * Shares before + Issue price * New shares / Total shares

= 30*2Mn + 6*1.7Mn / 3.7Mn = $18,97

d)

The loss is (30 -18.973)*300000 = -$3308108.108

If you lose it will go into other shareholders benefit