Company X is a listed company and has become the target of a hostile takeover. The company’s stocks currently trade at a price of q = £10 per share. However, it is estimated that, if the company were successfully taken over, the value of a share would jump to v = £15. Assume that X has dispersed ownership and that its shareholders are small and risk neutral. Assume also that the public offer is binding only if the bidder obtains at least 50% of outstanding shares and that, in this case, the bidder has to pay a transaction cost of 50p per share.
a. Determine the maximum share price that the bidder is willing to offer to the shareholders.
b. Given your answer in a., do you expect the takeover to succeed in equilibrium? Give reasons for your answer.
c. Is the equilibrium socially efficient? Give reasons for your answer.