Describe/define the target company`s

Problem 1

i) Describe/define the target company`s "clean price" in an announced merger.

ii) How does the clean price change over time if the deal continues on for a very long time, but has still not yet completed or closed? What tools can you use to track movements in the clean price over time?

Problem 2

Calculate the "fully diluted shares outstanding" for the following potential target company. The target company`s shares are trading in the market at $8.00. The potential acquirer has modelled that they are willing to pay $12.00 per share in an acquisition. The target company has basic shares outstanding of 100 million. The target company has employee share options outstanding, as outlined in Figure 1.

The target also has convertible bonds, with the following note in its most recent financial statements: "the Company has outstanding $200 million of 5.25% convertible notes which are included in long-term debt due within 1 year, on the company`s consolidated balance sheet. The notes are payable in cash at maturity unless holders exercise their option to convert the notes into shares of common stock. The initial conversion rate, provided under the terms of the notes, is 85.4908 shares of common stock per $1,000 principal amount of notes."

Figure 1

Problem 3

Discuss the risks a merger arbitrage trader would need to consider when contemplating investing in an announced acquisition.

Problem 4

i) Suppose that a high P/E ratio company undertakes acquisitions frequently, and usually buying companies with lower P/E ratios than itself. What should happen over the medium to long term to the P/E ratio of this serially acquisitive company? Is this type of serial-acquisition strategy value-destructive or not? Discuss.

ii) What does it mean for an acquiror to undertake a "dilutive transaction" and why do acquiring companies avoid undertaking dilutive purchases?