Dr. Robert Grossman founded Electro Cardio Systems, Inc, in 1972. The prinsipal purpose of the firm was to engage in research and development of heart pump devices... The attorney also found that Dr. Grossman and "friendly" members of the board of directors currently owned 175,000 shares of ECS. (The complete case is in the attachment).
a) How many more shares would Parker Medical Products need to purchase before the poison pill provision would go into effect? Given the current price of ECS stock of $42, what would be the cost to Parker to get up to that level?
b) ECS's ultimate fear was that Parker Medical Prducts would gain over a 50 percent interest in ECS's outstanding shares. What would be the additional cost to Parker to get 50% (plus 1 share) of the stock outstanding of ECS at the current market price of ECS stock? In answering this question, assume Parker had previously accumulated the 25% position discussed in question a.
c) Now assume that Parker exceeds the number of shares you computed in part b and gets all the way uo to accumulating 625,000 shares of ECS. Under the poison pill provision, how many shares must "friendly" shareholders purchase to thwart a takeover attempt by Parker? What will be the total cost? Keep in mind that friendly interests already own 175,000 shares of ECS and to maintain control, they most own one more share than Parker.
d) Would you say the poison pill is an effective deterrent in this case? Is the poison pill in the best interest of the general stockholders ( those not associated with the company)?
(See attachment for full background)
Solution provides answers to the case Electro Cardio Systems, Inc. from the Text Book Foundation of Financial Management by Stanley B Block.