Company X is a listed company and has become the target of a hostile takeover. The company currently trades at a price of q pounds per share. However, it is estimated that, if the takeover were successful, the value of a share would jump to v>q. Assume that X has dispersed ownership and that the stake of each individual shareholder is negligible. Assume also that the public offer is binding only if the bidder obtains at least 50% of outstanding shares and that, in this case, the bidder has to pay a small transaction cost c>0. a. Determine the maximum share price that the bidder is willing to offer to the shareholders. b. Given your answer in a., do you expect the takeover to succeed? Please give reasons for your answer. c. Assume now that, when acquiring the company, the bidder obtains a private benefit h>c. Do you expect the takeover to succeed in this case? Can you provide an economic interpretation for h?
Question 4
Company X is a listed company and has become the target of a hostile takeover. The company currently trades at a price of q pounds per share. However, it is estimated that, if the takeover were successful, the value of a share would jump to v>q. Assume that X has dispersed ownership and that the stake of each individual shareholder is negligible. Assume also that the public offer is binding only if the bidder obtains at least 50% of outstanding shares and that, in this case, the bidder has to pay a small transaction cost c>0.
a. Determine the maximum share price that the bidder is willing to offer to the shareholders.
b. Given your answer in a., do you expect the takeover to succeed? Please give reasons for your answer.
c. Assume now that, when acquiring the company, the bidder obtains a private benefit h>c. Do you expect the takeover to succeed in this case? Can you provide an economic interpretation for h?
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