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Evaluation of merger proposal

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Evaluation of merger proposal

  1. 1.  A merger refers to the process whereby at leasttwo companies combine to form one singlecompany. Business firms make use of mergersand acquisitions for consolidation of markets aswell as for gaining a competitive edge in theindustry. Merger is a financial tool that is usedfor enhancing long-term profitability byexpanding their operations. Mergers occur whenthe merging companies have their mutualconsent as different from acquisitions, which cantake the form of a hostile takeover.1RubySharma ,CBS,Landran ,Mohali
  2. 2. OPERATIONALSYNERGYFINANCIALSYNERGYSYNERGY2RubySharma ,CBS,Landran ,Mohali
  3. 3. Labor Economies ofscaleTechnicalEconomies of scaleMarketingEconomies of scaleManagerialEconomies of scaleProductionEconomiesof scale3RubySharma ,CBS,Landran ,Mohali
  4. 4. Bulk purchasing atlow costMonoposonisticAdvantageLow credit rateLow cost oftransportationPecuniaryEconomiesof scale4RubySharma ,CBS,Landran ,Mohali
  5. 5. DiversificationIncreasingborrowingcapacityTax benefitsAvoidingcapitalrationing5RubySharma ,CBS,Landran ,Mohali
  6. 6.  The process of financial evaluation beginswith determining the value of the target firm,which the acquiring firm should pay.The totalpurchase price or price per share of the targetfirm may calculated by taking into account ahost of factors such as, assets, earningsetc.The market price of a share of the targetfirm can be a good approximation to find outthe value of the firm.6RubySharma ,CBS,Landran ,Mohali
  7. 7.  Valuation based on assetsvalue of all assets-External liabilitiesI. Book value of the assetsII. Realizable value of the assets7RubySharma ,CBS,Landran ,Mohali
  8. 8. Valuation based on earningsMarket price per share=EPS*PE RatioORValue=Earnings/Capitalization rate*1008RubySharma ,CBS,Landran ,Mohali
  9. 9.  Dividend based valuationP0=D0(1+g)/Ke-gE.g. A company has paid a dividend of Rs. 15per share & growth rate in dividend is 7%.Atequity capitalization rate of 20% the marketprice of the share is?9RubySharma ,CBS ,Landran ,Mohali
  10. 10. MODE OFPAYMENTPAYMENTIN CASHPAYMENTIN SHARESLEVERAGEBUY-OUT10RubySharma ,CBS,Landran ,Mohali
  11. 11.  PAYMENT IN CASH-This does not effect the ownership pattern ofthe acquiring firm but requires the availabilityof sufficient liquidity with the acquiring firm.The payment in cash is subject to theagreement & consent of the shareholders ofthe target firm as for shareholders it raisetheir tax liability.11RubySharma ,CBS,Landran ,Mohali
  12. 12.  Payment in sharesThe shares of the target firm are exchanged forthe shares in the acquiring firm thus it willresult into:I. Increasing the number of shares in acquiringfirm.II. Sharing the ownership of acquiring firm byexisting shareholder of the acquiring firm &its new shareholders.12RubySharma ,CBS,Landran ,Mohali
  13. 13.  LEVERAGE BUY-OUTIn case of LBO, the takeover of the targetcompany is leveraged by borrowing frombanks & other institutions against the assetsof the target company. For this purpose, aSpecial PurposeVehical may be incorporatedas a subsidiary of the acquirer. Out of theequity contribution of acquirer & borrowingby SPV, the payment is made by SPV for thetarget.13RubySharma ,CBS , Landran ,Mohali
  14. 14. There are different methods of calculation ofshare exchange ratio:Based on EPS:EPS of target firm/EPS of acquiring firmBased on market price:MP of target firm’s share/MP of acquiringfirm’s shareBased on book value:BV of share of target firm/BV of share ofacquiring firm14RubySharma ,CBS,Landran ,Mohali
  15. 15. THANKYOU15RubySharma ,CBS,Landran ,Mohali

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