For each of the following scenarios, estimate how much value an acquisition will create, how much of that value will be appropriated by each of the bidding firms, and how much of that value will be appropriated by each of the target firms. In each of these scenarios, assume that firms do not face significant capital constraints.
(a) A bidding firm, A, is worth $27,000 as a stand-alone entity. A target firm, B, is worth $12,000 as a stand-alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by these other firms. If Firm A acquired Firm B, would this acquisition create value? If yes, how much? How much of this value would the equity holders of Firm A receive? How much would the equity holders of Firm B receive?
(b) The same scenario as above except that the value of Firm B, if it is acquired by the other firms interested in it, is only $12,000.
(c) The same scenario in part (a), except that the value of Firm B, if it is acquired by the other firms interested in it, is $16,000.
(d) The same scenario as in part (b), except that Firm B contacts several other firms and explains to them how they can create the same value with Firm B that Firm A does.
(e) The same scenario as in part (b), except that Firm B sues Firm A. After suing Firm A, Firm B installs a “supermajority” rule in how its board of directors operates. After putting this new rule in place, Firm B offers to buy back any stock purchased by Firm A for 20 percent above the current market price.