The management of Mitchell labs decided to go private in 2002 by buying in all 3

Question

The management of Mitchell labs decided to go private in 2002 by buying in all 3 million of its outstanding shares at 19.50 per share. By 2006 management had restructured the company by selling off the petroleum research division for 13 million, the fiber technology division for 9.5 million, and the synthetic products division for 21 million. Because these divisions had only been marginally profitable, Mitchell labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of 1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 3 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 16 times earnings per share. A. what was the initial cost to Mitchell labs to go private?

Explanation / Answer

The management of Mitchell Labs decided to go private in 2002 by buying in all 3 million of its outstanding shares at $19.50 per share. By 2006, management had restructured the company by selling off the petroleum research division for $13 million, the fiber technology division for $9.5 million, and the synthetic products division for $21 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 3 million shares it purchased to go private could be reissued to the public at a P/E ratio of 16 times earnings per share. a. What was the initial cost to Mitchell Labs to go private? b. What is the total value of the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 3 million shares (based on the current earnings and an anticipated P/E of 16)? c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from part a and b to determine this value.

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