Immense Appetite, Inc., believes that it can acquire Sleepy Industries and improve efficiency to the extent that the market value of Sleepy will increase by $5 million. Sleepy currently sells for $20 a share, and there are 1 million shares outstanding.
a. Sleepy's management is willing to accept a cash offer of $25 a share. Can the merger be accomplished on a friendly basis?
b. What will happen if Sleepy's management holds out for an offer of $28 a share?
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Total Market value of Sleepy = No. of share*current market price = 1 million * $20 = $20 millions
Efficiency Gains = 5 million
Total value of Sleepy to Immense Appetite = $20+5=$25 million
This problem will help students to understand the concepts of M&A such as cash offers in friendly deals.