ITT problem (9-2020) Consider the two offers presented in the Wall St. J. article. Assume: Volatility = 25% for both Hilton and Starwood, r = 6%, S(HLT)=31.81 (price on 10/31: $30.81; the text on the stock valuation of $27.73 refers to this price and can be ignored), S(HOT) = $52.10 (down from $54.25 on 10/31, and from $57.263 earlier). Both market prices given here are after the transaction is announced. They incorporate the information about the value of the transaction including the value synergy and the derivatives offered. No dividend is paid on these stocks. (HLT, HOT are the ticker symbols of Hilton and Starwood, respectively). Assume that ITT SH vote is expected 60 days from now. If Starwood's offer is supported, the deal will be completed 20 days after that, and on that day Starwood will pay for the deal according to its price on that day. If Hilton's offer is supported, the merger is completed 10 days after SH vote. Then, the cash part will be paid and the day count for the contingent value stock begins. The stock portion + one CVR against each share of Hilton that is given to ITT's shareholders will be paid 90 days after cash is paid. The year has 365 days. Assume for simplicity that when you consider each bidder's offer, the transaction is certain to go through with that bidder. Use post-announcement prices. Assume no transaction costs. Calculate the value of each offer. Hilton offer supported: merger completed 70 days from today Starwood: 80 days Cash paid then contingent value stock begins Hilton: stock portion ($80 share for 55%) in 90 days after cash paid (i.e. 160 days from today) Hilton: Cash: $80 a share for 55%, or $44 a share in cash Stock: Two shares of Hilton for one of ITT, for the remaining 45%, or about $27.73 a share in stock. Plus, contingent-Value stock i Hilfton trades below $40 a share one year after merger Maximum payment in cash or stock of $12 Closing: Cash paid one to two weeks after ITT shareholder vote. Stock portion 60 to 90 days thereafter Synergies: $115 milion STARWOOD/ITT: Cash: