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Q. 01: Gretach Industries is considering acquiring Flueger Systems. Although Flueger has said it is not for sale, Gretsch is considering a hostile takeover by making a tender offer directly to Flocger's shareholders. Meghan Doyle, a financial analyst with Gretsch, has been assigned the task of estimating a fair acquisition price forthe tender offer. Doyle plans to use three different valuation methods to estimate the acquisition price and has collected the necessary financial data for this purpose. Flueger Systems has 20 million shares outstanding. Doyle has estimated that at the end of each of the next four years, Flueger will have free cash flow to equity (FCFE) (in millions) of $24, $27, $32, and $36. After the fourth year, Doyle expects Flueger's FCFE to grow at a constant rate of Glo peryear. She also determines that Flueger's cost of equity of 10.5% is the appropriate discount rate to use for the analysis. Doyle has also found three companies that are in the same industry as Flueger and have a similar capital structure-Behar Corporation, Walters Inc., and Hasselbeck Dynamics, In addition, Doyle has identified data for three takeover transactions with characteristics similar to Flueger-Bullseye, Dart Industries, and Arrow Corp. Data for both sets of firms are shown in the following figure. Company Statistics Flueger Webers Inc. Havelbeck Caperation Dynamics Current mock price $32.00 $54.00 $36.50 $108.20 Earnings per share (EPS) (5) 1.75 2.80 2.10 6.50 Book value per share ($) 9.75 17.25 12.10 35.75 Sales per share (S) 29.75 52.75 3780 105.00 Company Statistic Bullseye Dart Industries Arrow Corp. Stock price pre-takeover $18.25 $27.80 $43.00 Acquaition mock price $22.00 $35.00 $52.00 Earnings per share (EPS) ($) 0.95 1.65 2.50 Book value per share ($) 6.10 9.85 14.20 Sales per share ($) 17.60 26.75 39.75 LBy Tyler, the CEO of Flueger Systems, was not happy when she heard the rumor that Gretsch Industries may try to take over Flueger in a hostile takeover. Tyler asked two of her executive vice presidents for suggestions on what her firm could do. Jordan Collier said, "If the Gretsch does make a hostile takeover offer, we could implement a fair price amendment to make sure a fair price is offered to our shareholders. Another EVP, Kyle Baldwin stated, "One option is to use a white knight defense and sell a minority stake to a third party that could help block Gretsch from making a deal." Requirements: 1. Calculate the stock price of Flueger Systems under the comparable company approach, assuming that all three Relative Value Measures i.c. (EPS, Book Value and Sales) carry equal weights in the final stock price determination. 3. Estimate the mean takeover premium (in percentage form) on the basis of historical data related to recent M& A transactions. Calculate the estimated takeover price (including premium) for Flueger on the basis of previously calculated value of its stock and the mean takeover premium. Finally calculate the fair acquisition price for Flueger System using the comparable transaction approach and corroborate your previously estimated takeover price
