On March 4, 1998, First Union Corporation announced the signing of a definitive

Question

On March 4, 1998, First Union Corporation announced the signing of a definitive merger agreement with The Money Store, Incorporated to create the largest coast-to-coast provider of home equity loans in the United States. For acquisitive-minded First Union, a leading financial services firm based in Charlotte, North Carolina, this acquisition would give the company access to low-and moderate-income borrowers. First Union would retain the brand name of The Money Store, as well as its management team. For Money Store, the buyout would allow cross-selling opportunities, for example, the ability to offer a credit card to its customers. In addition, the merger offers protection to Money Store against the recent shake-out in the subprime lending industry caused by loan losses and intense competition. Because the two firms have virtually no overlap, no layoffs or disruptions would result. Postmerger, Money Store would be managed as an autonomous unit of First Union. First Union planned to account for the merger as a purchase transaction and would pay for Money Store with its stock. According to the press release announcing the merger on March 4, 1998, First Union would purchase Money Store for $34 per share in First Union stock.2 The number of shares that ultimately would be exchanged would be determined by dividing $34 by the average closing price of First Union stock over the trading days prior to the merger closing. When the merger closed on June 30, 1998, First Union set the exchange ratio at 0.585, equal to $34 divided by $58.11, where the latter is the average closing price of First Union stock during June 23–29. Mergers of this sort are known as floating-ratio stock mergers because they specify the value per share rather than the number of shares to be exchanged. In contrast, the commonly used fixed exchange ratio merger, as in the Hispanic Broadcasting example discussed in the text, specifies the exchange ratio at the time of the merger announcement. By fixing the value per share rather than the exchange ratio, the merging parties lock in the transaction value rather than have it vary with the price of the acquirer stock during the merger period. .On the day before the March 4, 1998, merger announcement, First Union stock closed at $52.75. Had First Union set an exchange ratio based on this predeal announcement stock price, what would it have been? What is the effect of the difference in this exchange ratio and the actual exchange ratio on the wealth of The Money Store shareholders? (Weston 100-101) Weston, J. F., Mark Mitchell, J. Mulherin. Takeovers, Restructuring and Corporate Goverance, 4th Edition. Pearson Learning Solutions. VitalBook file.

Explanation / Answer

First Union stock closed at $52.75. BUT First union has fixed exchange ratio based on average price on closing of merger at $58.11

If First Union HAS set an exchange ratio based on this predeal announcement stock price, THEN EXCHANGE RATIO Will be = $34/52.75= 0.6445

Actual Exchange ratio fixed = 0.585

If exchange ratio have been fixed based on predeal Price then wealth of Mony store shareholder will increase because then they will get 0.6445 share for every share held in money store but based on closing merger price exchange ratio they will get 0.585 share for every share held in Money store.

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