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ACCA Strategic Professional · Advanced Financial Management · Regulatory framework and processes

Bidder Ltd offers $5.00 per share for Target Inc, which has 10 million shares in issue at a market price of $4.00 before the bid. Target's board argues the shares are worth $6.20 and rejects the offer. Target's management then proposes a defence that costs $1.5 million in advisory fees, and the bid is withdrawn. After withdrawal the share price falls to $4.10. Compared with the $5.00 bid, what is the total change in shareholders' wealth, ignoring the fees, from the failed bid at the post-withdrawal price?

Shareholders lose $9.0 million. The offer valued the 10 million shares at $50 million, while after withdrawal they are worth 10 million × $4.10 = $41 million, so the difference is a $9 million fall. The advisory fees are a company cost and are not included in this comparison.

  1. ALoss of $9.0 millionCorrect
  2. BGain of $1.0 million
  3. CLoss of $10.5 million
  4. DLoss of $5.0 million

Explanation

Value under offer = 10m × $5.00 = $50m. Value after withdrawal = 10m × $4.10 = $41m. Change = $41m − $50m = −$9m. Adding the fees gives $10.5m, which wrongly mixes in company costs. Using the pre-bid $4.00 gives −$10m.

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