Please refer to image: What is the gain and cost of the merger? What was the day

Question

Please refer to image:

What is the gain and cost of the merger?

What was the days fall in Fenton's stock price?

Could Fenton afford to raise its bid at a later stage?

Question McPhee Food Halls operated a chain of supermarkets in the wes,t of Scotland. The company had had a lackluster record, and since the death of its founder in late 2004, it had been regarded as a prime target for a takeover bid. In anticipation of a bid, McPhee's share price moved up from £4.90 in March to a 12-month high of £5.80 on June 10, despite the fact that the London stock market index as a whole was largely unchanged Almost nobody anticipated a bid coming from Fenton, a diversified retail business with a chain of clothing and department stores. Though Fenton operated food halls in several of its department stores, it had relatively little experience in food retailing. Fenton's management had, however, been contemplating a merger with McPhee for some time. The managers not only felt that they could make use of McPhee's food retailing skills within their department stores, but they also believed that better management and inventory control in McPhee's business could result in cost savings worth £10 million. Fenton's offer of 8 Fenton shares for every 10 McPhee shares was announced after the market close on June 10. Since McPhee had 5 million shares outstanding, the acquisition would add an additional 5 x (8/10-4 million shares to the 10 million Fenton shares that were already outstanding. While Fenton's management believed that it would be difficult for McPhee to mount a successful takeover defense, the company and its investment bankers privately agreed that the company could afford to raise the offer if it proved necessary Investors were not persuaded of the benefits of combining a supermarket with a department store company, and on June 11 Fenton's shares opened lower and drifted down £.10 to close thte day at £7.90 McPhee's shares, however, jumped to £6.32 a share Fenton's financial manager was due to attend a meeting with the company's investment bankers that evening, but before doing so, he decided to run the numbers once again. First he reestimated the gain and cost of the merger. Then he analyzed that day's fall in Fenton's stock price to see whether investors believed there were any gains to be had from merging. Finally, he decided to revisit the issue of whether Fenton could afford to raise its bid at a later stage. If the effect was simply a further fall in the price of Fenton stock, the move could be self-defeating

Explanation / Answer

Answer:

Re-estimated Gain of Merger should be cost saving of GBP10 million(as estimated earlier) minus 1 million(10 million shares * .10 per share drift). It should be 9 million.

Investors were not persuaded of the benefits of combining a supermarket with a department store. This was the main reason of day's fall in the Fenton's stock price.

Yes, Fenton could afford its bid at later stage if it manages to persuade investors about the potential benefits. This could lead to restoration of Fenton's stock price and bid given by Fenton comes out to be good.

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