Thomas Jonhson, the chairman and CEO of Audi, Inc, was in his office looking forward to a relaxing weekend. It had been a good week. The companys annual results showed that 2022 had been the best year in the companys history. Sales and net profit were up over 8 percent from last year, and there was over $1.1 Billion dollars in the cash account to invest in the coming year. Suddenly the phone rang and it was Claris Oriol, his evening wasnt going to be so relaxing after all.

Andrew Smith, head of Tesla, announced that he has bought 5 percent of our outAmandading shares, and now he is making a tender offer for all the rest at $58.

I knew it! Thomas spat out. He was visiting us a few weeks ago, talking about whether we would sell the company to him. We rejected his offer because we want to stay independent, and he left not very satisfied by our answer. Hes got some plan to restructure the company

around a five-member board of directors instead of the 15 we have now. Now hes trying to do it anyway, whether we like it or not!

Looks like it, Claris agreed, so what do you think we should do? OK, call urgently Andres Colomba, the general operating officer, and Michael Scott (CFO) and tell them to get up here as soon as possible for an urgent meeting, Thomas directed. Oh, and call also Amanda Ross from public relations to come, too; were sure to have a press release about this.

After about half an hour, those that Thomas had called began arriving, armed with pencils, papers, and calculators in anticipation of the coming meeting. Thomas, in the meantime, had managed to compile some financial data about Tesla, which he had summarized on a sheet of paper along with comparable data on his own company, Audi, (see Figure 1). He passed the sheet around among the others.

OK, lets start with what we know, Thomas led off. TESLA already has 5 percent of our outstanding shares, and is making a bid for the rest at $58.

I hate to be the devils advocate, Amanda said, thinking of the 1,000 shares he owned personally, but that sounds like a pretty fair offer. What will happen if he succeeds?

Most of us will be out of a job, and this company will become just another card in Andrew Smiths poker hand, Thomas said acidly. Our employees deserve better than that, so lets talk about what we can do to keep it from happening.

What about a poison pill? Andres suggested. We could take out a fair-sized loan based on our heavy cash position, and TESLA would have a tough time absorbing itjust look at the amount of debt theyre carrying now!

That would probably work, but its not very good for us, either, Amanda agreed. He was still thinking about the seven dollars a share profit to be made in a buyout. So, how about someone else? You know, a white knight who would top TESLAs offer but would keep the structure of the company substantially the same as it is now.

I dont know who we could ask, Thomas said, and besides that, the basic problem would probably still occurwe would lose our status as an independent entity.

Michael had been working on some figures on hir pad, and he spoke up now. Theres another alternative, he said, that Im surprised you all havent mentioned, given the financial status of the two companies.

What, what! Thomas said. Dont keep us in suspense!

Its the Pac Man defense, he continued, unruffled. What we do is launch a tender offer of our own for all of TESLAs outstanding stock. If its successful, we not only thwart the takeover attempt but we gain a new business in the bargain.

Didnt Jeff Lorantry try that with Axis back in 2022? Thomas asked. As I recall, it didnt turn out very well for them.

Youre right, it didnt, Michael agreed, and no one else has tried it since. But, just comparing numbers here between Audi and TESLA, I think it might work out quite well for us. Ive been doing some calculating here, and I think an offer to TESLAs shareholders of $19 a share would be accepted, and we could conclude the whole affair rather quickly.

Im interested, Thomas said. Tell you what, put your finance staff on it over the weekend and have them work up the proposal formally. Get the legal and accounting people to help you, too. In the meantime, Amanda, tip off the news media that we will have an announcement of our own shortly and draft up a public notice for TESLAs shares at $19 each. Dont release it yet, but be ready to on Monday. Oh, and be sure to include in it that I said the deal will not cause any dilution of Audis earnings per share. One last thing. Michael, draft an open letter to our shareholders for my signature, explaining whats happening and reassuring them that we will keep their company intact and prosperous.

Any questions? If not, lets get on itMr. Andrew Smith is about to get a surprise!

Required:

a. TESLAs offer is $58 a share for each of Audis stock. How much cash it will need to have to buy the company?

b. Assume TESLA plans to borrow the money which is needed to make the takeover. If TESLA uses the amount of liquid assets presently on hand at Audi to offset the amount it needs to borrow, what is the net amount it will have to borrow?

c. Assuming TESLA does borrow the amount. (From question above) What will be total debt of TESLA after the purchase is completed? (In making your calculation, consider all forms of debt that the combined firm will have.)

d. Now compute TESLAs debt-to-equity ratio. Given this ratio, do you think it is likely that TESLA will be able to obtain the necessary debt financing?

e. Suppose TESLA decides to issue stock to raise the money needed for the purchase (the amount you computed in b above will be raised through a stock issue instead of by borrowing). How many shares TESLA should issue? (Assume the price at which it will be issued is $15 and disregard flotation costs.)

f. If TESLA does raise the money by issuing new shares of its stock, what will be TESLAs Earnings Per Share after the purchase is complete and earnings are combined?

g. Do you think TESLAs shareholders will be happy if this deal goes through? What about the old Audi shareholders?

h. Do you think that Audis stockholders are better off as a result of TESLAs attack and Audis Pac Man defense (assuming it succeeds)?

i. Do you think Andrew Smith, head of TESLA, should be viewed as a good guy, whose action will produce more efficient companies, or a bad guy, who is a destroyer of traditional values and employees careers?

Figure 1 Financial Data