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The firm Techone is entirely financed by equity. It has 4 million shares and a current share price of $8. It is public knowledge that the firms current management is inefficient and the firms share price would be $11 if well managed. Techones shares are owned entirely by small shareholders. The administrative costs to acquire Techone would be $0.14 million. An acquirer can gain control of the firm and manage it efficiently if they can purchase at least 51% of its shares. Assume the market is semi-strong form efficient.

1. Edison, an entrepreneur, can secretly buy 5% of Techones shares at the current market price, then make a public bid for a further 46% of the total number of shares at $11 each. What is Edison's profit? Will the takeover go ahead? Explain.

2. Assume that Edison implements the strategy described in part (a). Techone has made a provision that when a potential acquirer reaches a holding of 16% of its shares, all shareholders except the acquirer will be able to buy one new share in Techone for each share they own at a 40% discount off the current market price. The market believes that Edison will take control and you can assume a current market price of $11 to start with.

1. How many new shares will be issued?

2. After the provision has been triggered, what will be the market price of a share in Techone? What will be the value of Edisons shareholding inTechone?

3. Will the takeover go ahead? Explain.

3. Identify and briefly explain an alternative strategy Edison might use to implement an efficient takeover of Techone. (80 words)

4. How might the existence of a large shareholder potentially affect a firms market value? Explain. (100 words)

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