Firm A seeks to acquire ( previously owned) firm T whose ultimate dollar value is uncertain because of its possible liability for the past production of hazardous waste. The table shows A's and T's respective value (in $ millions) for the firm conditional on whether the firm is found to be liable. None that A and T have different contingent values and different probability assessments ( shown in parentheses) as to T's liability. Both firms are risk neutral.
Value of Firm T
T Not Liable T Liable
A's Value 50 (.5) 20 (.5)
T's Value 40 (.8) 30 (.2)
A. Firm A is hoping to acquire T in 100 percent cash transaction. Is a mutually beneficial 100 percent cash transaction possible? Explain.
B. Instead, suppose that firm A considers acquiring T, paying all or in part with its own stock. (the owner of T are prohibited from selling the stock they receive for two years.) If A acquires T and subsequently T is found liable, both sides expect that A's Stock price will fall by 50 percent. Is a mutually beneficial 100 percent stock transaction possible? (provide an example to show whether the answer is yes or no.)
C. The firms are considering a provision in the acquisition allowing T's senior managers ( who will continue to work for the combined firm) to buy back (at a predetermined price) ownership of T in the event that the firm is found liable. Does such a provision make sense? Provide a qualitative explanation