i'll pay a grand total of 0




"Eva Pao" <epao@mba2002.hbs.edu> on 05/10/2001 05:15:59 PM
Please respond to <epao@mba2002.hbs.edu>
To: <jarnold@enron.com>
cc:  
Subject: try this one...


 Please read the following problem very carefully, and write in a number at
the end.  You should be ready to defend your answer.  Only a number is
allowed, not an algebraic equation.

Acquiring a Company

 In the following exercise you will represent Company A (the acquirer),
which is currently considering acquiring Company T (the target) by means of
a tender offer.  You plan to tender in cash for 100% of Company T's shares
but are unsure how high a price to offer.  The main complication is this:
the value of Company T depends directly on the outcome of a major oil
exploration project it is currently undertaking.  Indeed, the very viability
of Company T depends on the exploration outcome.  If the project fails, the
company under current management will be worth nothing--$0/share.  But if
the project succeeds, the value of the company under current management
could be as high as $100/share.  All share values between $0 and $100 are
considered equally likely.  By all estimates, the company will be worth
considerably more in the hands of Company A than under current management.
In fact, whatever the ultimate value under current management, the company
will be worth fifty percent more under the management of A than under
Company T.  If the project fails, the company is worth $0/share under either
management.  If the exploration project generates a $50/share value under
current management, the value under Company A is $75/share.  Similarly, a
$100/share value under Company T implies a $150/share value under Company A,
and so on.

 The board of directors of Company A has asked you to determine the price
they should offer for Company T's shares.  This offer must be made now,
before the outcome of the drilling project is known.  From all indications,
Company T would be happy to be acquired by Company A, provided it is at a
profitable price.  Moreover, Company T wishes to avoid, at all cost, the
potential of a takeover bid by any other firm.  You expect Company T to
delay a decision on your bid until the results of the project are in, then
accept or reject your offer before the news of the drilling results reaches
the press.

 Thus, you (Company A) will not know the results of the exploration project
when submitting your price offer, but Company T will know the results when
deciding whether or not to accept your offer.  In addition, Company T will
accept any offer by Company A that is greater than the (per share) value of
the company under current management.  Thus, if you offer $50/share, for
instance, Company T will accept if the value of the company to Company T is
anything less than $50.

 As the representative of Company A, you are deliberating over price offers
in the range of $0/share (this is tantamount to making no offer at all) to
$150/share.  What price offer per share would you tender for Company T's
stock?

 $______ per/share