Question

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company.​ UnderWater's stock price is

$ 20$20

and it has

2.002.00

million shares outstanding.You believe that if you buy the company and replace its​ management, its value will increase by

38 %38%.

You are planning on doing a leveraged buyout of UnderWater and will offer

$ 25.00$25.00

per share for control of the company.

a. Assuming you get

50 %50%

​control, what will happen to the price of​ non-tendered shares?

b. Given the answer in part

​(a​),

will shareholders tender their​ shares, not tender their​ shares, or be​ indifferent?

c. What will your gain from the transaction​ be?

Answer 1

Information Given is as below

UnderWater's stock price $ 20/each and $20/each

No. of OUtstanding shares 2 million each
Increase in share value 38%

a leveraged buyout of UnderWater and will offer $ 25.00

To find

a. Assuming you get

50%​control, what will happen to the price of​ non-tendered shares?

Answer: Tender of a share depends and individual investor choice whether they want to sell it to you or prefer to keep the stocks with them.
Since per this part of the question we assume that one has 50 per cent of share i.e. half of the share of Underwater company, however, this does not give one the power to change the management unless and until one has the support of other-half of members.
Thus the price of non-tendered shares will remain $20/each and they have similar rights which they had before one owned the shares. Also, management remains unchanged.

b. Given the answer in part​(a​) will shareholders tender their​ shares, not tender their​ shares, or be​ indifferent?

Answer B:
Tender Their Shares: Per the price offered i.e $25/share instead of $20/share is a lucrative offer since the shareholders are able to earn $5/share by just selling the share for offered tender. Thus way to trade the share at a premium and earn profit as well as help in public acquiring fo the firm.

Not Tender Their Shares: However, there are instances where shareholders due to some reasons like the capital gain realisation and the tax implications associated with it due refuse to accept this offer.
One may have received tender and this tells that your shares are crucial and you see an opportunity to hold on to share in order to gain at a later stage.

Be​ indifferent: They are those investors for whom holding of the share has a different purpose other than making a profit, they at times act like the management well-wishers who keep share just to have a representation of management.

c. What will your gain from the transaction​ be?

Answer C: When one tries to acquire a firm through tender offering it is called the public way of hostile acquiring and is costly usually. However, the benefit the acquirer gets is way more than the one that can be realised from the market usually.
Plus here also we can see that the profit is going to increase with an estimated increase of 38% in the price of a share and after acquiring when the shares will be again sold at the market price will be higher than what was offered in tender and thus by this transaction, the only acquirer is able to make huge profits

Below is the calculation for the above question only
Tender price = $25/share

Total outstanding share = 2.5 million

If One is able to gain 85% share then

85% of 2.5 million shares = 2.1 million shares
The price paid for 2.1 million shares at $25/each = 53.1 million dollar

38% increase in share price means
New Share price = $20 +($20*0.38)
   = $34.5

However, the acquirer paid $53.1 million at a rate of $25/share
Therefore, the price difference per share = $34.5- $25
   = $9.5
Now, if the shares are sold at $34.5/share = $34.5 * 53.1
   = $73.1 million
The gain in over all transaction = $73.1 - $53.1
   = $20 million