You work for a leveraged buyout firm and are evaluating a potential buyout of Underwater Company. UnderWater’s stock price is $20, and it has 2 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 40%. You are planning on doing a leveraged buyout of Underwater, and will offer $25 per share for control of the company.
a. Assuming you get 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?
