The Hollings Corporation is considering a two-step buyout of the Norton Corporat

Question

The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.1 million shares outstanding and its stock price is currently $40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for $58 per share in cash and the balance in a second offer of 800,000 convertible preferred stock shares. Each share of preferred stock would be valued at 50 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all of Norton’s shares be made at $55.25 per share. a. Calculate the total costs of the two alternatives.

Explanation / Answer

A) Average cost for first option

(0.51*2.1*10^6*58 + 800,000*1.5*40 )/2100000 = $52.437 per share

Total Cost = 0.51*2.1*10^6*58 + 800,000*1.5*40 = $ 110,118,000

B) Average Cost for Second = $55.25 per share

Total Cost = 55.25*2.1*10^6 = $ 116,025,000

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