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Cost of buyout

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Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 3,000,000 shares of common stock currently outstanding, and the market price is currently $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $34 per share, The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $27.50 per share.

Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.

(a) What is the total cost of the two-step buyout?
(b) What is the total cost of the single step proposal?
(c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

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Solution Summary

The solution explains how to calculate the cost of buyout using single step and two step

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(a) What is the total cost of the two-step buyout?

Total cost = 51% of shares @ $34 + 49% of shares X ...

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