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 user 2008-03-19 at 11:47:23 am Views: 57
  • #21842

    Why Staples Will Increase Its Offer for Corporate Express
    you go to a casino and spot a big bucket filled with 100 balls. There
    are 51 red balls and 49 blue balls. Next to the bucket there is a sign
    which informs you that you can guess the color of a randomly drawn ball
    for $1. If you are right, you will receive $2, but if you are wrong you
    will lose your bet. A rational investor will take a seat next to this
    bucket and will not leave anymore. By consistently betting on a red
    ball being drawn, he can calculate a 51% chance of achieving a return
    of $2 and a 49% chance of a return of $0, which gives an expected
    return of $1.02 for an investment of $1.

    We can apply the
    methodology of this simple probability calculation to determine what
    the expected value of the acquisition by Staples (SPLS) of Corporate
    Express (CXP) will be. In this case, there are a couple of
    complications and we need to make some extra assumptions to make this
    calculation.The easy part is determining the value of the bet, which is
    equal to the actual stock price of Corporate Express. At the time of
    writing, this was about 7.80 Euro, a premium of 7.5% in comparison with
    the offer from Staples of 7.25 Euro. Subsequently, we can calculate how
    much a rational investor wants to receive when the acquisition is
    finalized. I assume closing of the acquisition will not take place
    before the end of May, which means that Corporate Express shareholders
    will have received a dividend of 0.21 Euro before this closing. The
    rational investor, who is only concerned with probability calculations,
    will expect to receive at least an amount of approximately 7.87 Euro at
    the end of May, assuming an interest rate for short term deposits of
    4%. At the end of April, he will already have received 0.21 Euro, which
    implies that the remainder of 7.66 Euro has to come from his bet on the
    outcome of the draw from the bucket of balls.

    We still need to
    determine the probability of the outcomes and the values of the
    outcomes of the draw. Since Corporate Express was trading in a range of
    5.00 – 5.50 Euro before the offer from Staples, I assume the share
    price could drop to 5.00 Euro again, if the acquisition fails to take
    place. I assign this outcome a probability of 20%. We still don’t know
    the value of a successful offer, but we do know that the rational
    investor wishes to receive at least 7.66 Euro. Knowing this, we can
    calculate the value of the expected offer, which has a chance of 80%.
    The calculation is (7.66 – (0.20 x 5)) / 0.80 = 8.33. With this offer
    price, an investor has a chance of 20% to receive 5 .00 Euro, and a
    chance of 80% to receive 8.33 Euro. This gives an expected return of
    7.66 Euro, exactly his minimum requirement. Including dividend, the
    offer would have to be 8.54 Euro.

    If we would assign a chance of
    70% to a successful offer, the acquisition price would need to be 9.02
    Euro, while an expected chance of 90% of success gives an acquisition
    price of 8.17 Euro.The conclusion is that the rational calculating
    investor, who is presently considering taking a position in Corporate
    Express for a price of 7.80 Euro, and who assigns a 80% chance of
    success for the acquisition to take place, expects a final offer of
    8.54 Euro, including dividend. If the offer fails, this investor will
    expect the share price could drop back to 5.00 Euro.I believe that most
    current shareholders of Corporate Express are rational calculating
    investors, and that they believe a revised offer needs to be at least
    somewhere in the 8-9 Euro range to be successful. If Staples is serious
    about its intentions to acquire Corporate Express, it is hard to
    imagine that they would not have expected that an increased offer would
    be required. If this is the case, the indicated range should not come
    as a surprise either.