The structure of the Transaction:
The overall structure of the transaction between the Rhone-Poulencand Human pharmaceutical business is as follows:
- Rhone-Poulenc first made abid to acquire the 43.2 million shares of Rorer’s common stock which consists of 50.1% shares of the group for $36.50 per share.
- Rorer tookover the $265 million debt of Rhone-Poulenc which was backed by the guarantee of Rhone-Poulenc, it also made a $20 million cash payment to Rhone-Poulenc.Moreover, it issued 48.4 million common stocks to Rhone-Poulenc in exchange for the Human Pharmaceutical business division of Rhone-Poulenc.
- In addition to above-statedconsiderations,Rhone Poulenc issued the 41.8 million CVRs to the minority stockholders of Rorer. A CVR gives theright to holders of CVR to receive a cash payment at the end of three years i.e. 31 July 1993 of $49.13 reduced by the higher of the value the Rhone-Poulenc Rorer at that date or $26.00. This right can be extended for four years which gives the rise in acash payment of $53.03.
Answer Number 2:
Contingent value rights are createdto attract shareholders to sell their holdings. When the target company is facing significant restructuring, the contingent value rights ensures that the shareholders of the acquiring companyreceive some extra benefits due to the occurrence of certain events. The contingent value rights are offered as a gesture to discourage current stockholders from selling the stock if the price doesn’t rise quickly and drastically.
Answer Number 3:
The aggregate value of the option when the merger was finalized is computed through Black-Sholes Option Pricing Model.The value of call option at that time was $9.87,and the value of put option was $2.23.
The value of the option at the date of thecase using Black-Sholes option pricing model would be $6.13 for thecall option and $3.61 for aput option.
Markets are valuing the options effectively, for any option or underlying stock,thevery player whois involved in the trading decides the price which he is going to pay or receive. If the price of stock or underlying asset is false, the sale will not happen. If the sale occurs, for both parties the price is correct by definition. Any particular transaction most likely is efficient.The Black-Sholes model is not a formula of how a price is set and the volatility is just a factor that allows the result of the formula to be adjusted to match what happens.
Answer Number 4:
If the CVR programis extended by one year i.e. (after five years), it will bring some negative results on the company because the value of call option will increase to almost $15.2. However, it has some positive results on the investors. The value of the options of the investors will be increased and they might force Rhone-Poulenc Rorer to extend the maturity of the contingent value rights further.
Answer Number 5:
Public investors in Rhone-Poulenc Rorer fared well from the merger of Rhone-PoulencRorer; they got various benefits from the merger. By merging both the acquisitions the annual sales of the combined company grew more than $3 billion, not only this, the combined company is now ranked in the top ten pharmaceutical companies in the world…………………..
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