1. In June 2010 Omni Development Corp. proposed a merger with RedStar, Inc. via a pure share exchange in which Omni would exchange 1.43291 of its shares for every RedStar share. Fiscal year 2009 data for each company were as follows:

Omni RedStar Net income $68.0 M $48.5 M Common shares 42.3 M 33.4 M Stock price (pre-announcement) $36.25 $42.88

a. Calculate the 2009 EPS and P/E ratio of each firm.

b. Calculate the 2009 pro-forma EPS of the merged company assuming the exchange took place.

c. Is the transaction dilutive or accretive to the acquirers EPS? By what percentage amount?

d. Find the value of synergy required in order for Omni to break even from this deal.

e. Due to the inability of Omni managers to specify any synergies, analysts widely suspect that synergies from the merger are zero. What is the expected share price of the combined firm?

f. What price is Omni offering for one share of RedStar? What is the percent premium?

2. You work for the legendary buyout firm KKR. You are evaluating a potential leveraged buyout of Feckless Corporation. Feckless has no debt, its stock price is $20, and it has 2 million shares outstanding. You believe that if you buy the company, introducing $23 million in debt onto its balance sheet, and replace its management, its value will increase by 60%. You are planning to offer $23 per share for a 50% controlling interest in the company. If enough shareholders tender to give you control, then the shares will be purchased with debt through a shell company you own that will later be merged into Feckless, so that Feckless assumes this debt. The shareholders know that this is your plan.

a. If you get 50% control, what will be the value of equity in the post-merger firm? What will be the new share price?

b. Given the answer in (a), will shareholders tender their shares, not tender their shares, or be indifferent?

c. How much of your own money would you have to spend to gain control? What will your gain from the buyout transaction be? What fraction of the total value added to Feckless does this represent?

3. Yesterday, Fortune Corp. made a hostile tender offer for 100% of the shares of Shurtech Inc. at a bid price of $42.80. The average stock price of Shurtech over the prior month was $34.12. The managers of Shurtech have called this offer unsolicited, unwanted, and bad for shareholders and have vowed to fight this attempted takeover with every legal means available. Shares of Shurtech closed today at a price of $38.73. What is the arbitrage spread and what is the markets forecast of the probability that the takeover is consummated?