Valuation for Amalgamation/ Mergers- Valuation of Shares With increasing globalization and dispersion of technology, product life-cycles are shortening and competition is becoming intense, where there is little room for organizations to meet their growth aspirations through internal development or organic growth. In order to achieve speedy growth with limited market access, technology, finance and time, corporates worldwide have preferred to grow inorganically through the route of mergers and acquisitions (M&A) From the beginning of the 21st century, India has witnessed a tremendous growth in M&A activities, both inbound & outbound. However, the recent economic downturn has eclipsed the M&A landscape almost halving the deals in both number and value. Cross border M&A deal values have fallen from USD 42 billion in H1 2007 and USD 12 billion in H1 2008 to just USD 1.4 billion in H1 2009. This marks an 85% decrease from last year highlighting the lack of overseas deals. Domestic deals have registered USD 3.5 billion in H1 2009 compared to USD 4.3 billion in H1 2008 . The buoyancy in the domestic market could be attributed in part to Indian companies looking for group consolidation, cash repatriation strategies and avenues for balance sheet restructuring all in an attempt to tide over the current crisis. With reports of green shoots showing in some European economies there is some optimism that the economic crisis may pass by the third or fourth quarter of 2009. However the M&A space is still being treaded upon cautiously and there is not enough clarity on when volumes would get back to the highs of 2008. However, there remains a huge potential for M&A as in spite of the economic crisis, the advantages of inorganic growth still fit in the modern corporate rationale. This article attempts to provide a broad overview of various aspects of M&A activities. CERTAIN IMPORTANT CONCEPTS IN M&A Merger and Amalgamation A merger may be regarded as the fusion or absorption of one thing or right into another. A merger has been defined as an arrangement whereby the assets, liabilities and businesses of two (or more) companies become vested in, or under the control of one company (which may or may not be the original two companies), which has as its shareholders, all or substantially all the shareholders of the two companies. In merger, one of the two existing companies merges its identity into another existing company or one or more existing companies may form a new company and merge their identities into the new company by transferring their business and undertakings including all other assets and liabilities to the new company. The process of merger is also alternatively referred to as “amalgamation”. The amalgamating companies loose their identity and the shareholders of the amalgamating companies become shareholders of the amalgamated company.

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Question02. Valuation for Amalgamation/ Mergers-Valuation of Shares
With increasing globalization and dispersion of technology, product life-cycles are shortening
and competition is becoming intense, where there is little room for organizations to meet their
growth aspirations through internal development or organic growth. In order to achieve speedy
growth with limited market access, technology, finance and time, corporates worldwide have
preferred to grow inorganically through the route of mergers and acquisitions (M&A)
From the beginning of the 21st century, India has witnessed a tremendous growth in M&A
activities, both inbound & outbound. However, the recent economic downturn has eclipsed the
M&A landscape almost halving the deals in both number and value.
Cross border M&A deal values have fallen from USD 42 billion in H1 2007 and USD 12 billion
in H1 2008 to just USD 1.4 billion in H1 2009. This marks an 85% decrease from last year
highlighting the lack of overseas deals.
Domestic deals have registered USD 3.5 billion in H1 2009 compared to USD 4.3 billion in H1
2008 . The buoyancy in the domestic market could be attributed in part to Indian companies
looking for group consolidation, cash repatriation strategies and avenues for balance sheet
restructuring all in an attempt to tide over the current crisis.
With reports of green shoots showing in some European economies there is some optimism that
the economic crisis may pass by the third or fourth quarter of 2009. However the M&A space is
still being treaded upon cautiously and there is not enough clarity on when volumes would get
back to the highs of 2008.
However, there remains a huge potential for M&A as in spite of the economic crisis, the
advantages of inorganic growth still fit in the modern corporate rationale.
This article attempts to provide a broad overview of various aspects of M&A activities.

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CERTAIN IMPORTANT CONCEPTS IN M&A
Merger and Amalgamation
A merger may be regarded as the fusion or absorption of one thing or right into another. A
merger has been defined as an arrangement whereby the assets, liabilities and businesses of two
(or more) companies become vested in, or under the control of one company (which may or may
not be the original two companies), which has as its shareholders, all or substantially all the
shareholders of the two companies. In merger, one of the two existing companies merges its
identity into another existing company or one or more existing companies may form a new
company and merge their identities into the new company by transferring their business and
undertakings including all other assets and liabilities to the new company.
The process of merger is also alternatively referred to as “amalgamation”. The amalgamating
companies loose their identity and the shareholders of the amalgamating companies become
shareholders of the amalgamated company.
The term amalgamation has not been defined in the Companies Act, 1956. However, the Income-
tax Act, 1961 (‘Act’) defines amalgamation as follows:
“Amalgamation”, in relation to companies, means the merger of one or more companies with
another company or the merger of two or more companies to form one company (the company or
companies which so merge being referred to as the amalgamating company or companies and the
company with which they merge or which is formed as a result of the merger, as the
amalgamated company) in such a manner that—
• all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation;

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• all the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation;
• shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies become shareholders of the amalgamated company by
virtue of the amalgamation,
and not as a result of the acquisition of the property of one company by another company
pursuant to the purchase of such property by the other company or as a result of the distribution
of such property to the other company after the winding up of the first-mentioned company;
Thus, the above three conditions should be satisfied for a merger to qualify as an amalgamation
within the meaning of the Income-tax Act 1961.
Mergers are generally classified as follows:
1. Cogeneric mergers or mergers within same industries
2. Conglomerate mergers or mergers within different industries
Cogeneric mergers
These mergers take place between companies within the same industries. On the basis of merger
motives, cogeneric mergers may further classified as:
i. Horizontal Mergers
ii. Vertical Mergers
Horizontal mergers takes place between companies engaged in the same business activities for
profit; i.e., manufacturing or distribution of same types of products or rendition of similar
services. A classic instance of horizontal merger is the acquisition of Mobil by Exxon. Typically,
horizontal mergers take place between business competitors within an industry, thereby leading

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to reduction in competition and increase in the scope for economies of scale and elimination of
duplicate facilities. The main rationale behind horizontal mergers is achievement of economies
of scale. However, horizontal mergers promote monopolistic trend in an industry by inhibiting
competition.
Vertical mergers take place between two or more companies which are functionally
complementary to each other. For instance if one company specializes in manufacturing a
particular product, and another company specializes in marketing or distribution of this product,
a merger of these two companies will be regarded as a vertical merger. The acquiring company
may expand through backward integration in the direction of production processes or forward
integration in the direction of the ultimate consumer. The merger of Tea Estate Ltd. with Brooke
Bond India Ltd. was a case of vertical merger. Vertical mergers too discourage competition in
the industry.
Conglomerate mergers
Conglomerate mergers take place between companies from different industries. The businesses
of the merging companies obviously lack commonality in their end products or services and
functional economic relationships. A company may achieve inorganic growth through
diversification by acquiring companies from different industries. A conglomerate merger is a
complex process that requires adequate understanding of industry dynamics across diverse
businesses vis-à-vis the merger motives of the merging entities.
Methods of valuation
The methods of valuation depend on the purpose for which valuation is required. Generally,
there are three methods of valuation of shares:

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1. Net Asset Method Of valuation of shares
Under this method, the net values of assets of the company are divided by the number of shares
to arrive at the value of each share. For the determination of net value of assets, it is necessary to
estimate the worth of the assets and liabilities. The following points should be considered while
valuing of shares according to this method:
 Goodwill must be properly valued.
 The fictitious assets such as preliminary expenses, discount on issue of shares and
debentures, accumulated losses etc. should be eliminated.
 The fixed assets should be taken at their realizable value.
 Provision for bad debts, depreciation etc. must be considered.
 All unrecorded assets and liabilities ( if any) should be considered.
 Floating assets should be taken at market value.
 The external liabilities such as sundry creditors, bills payable, loan, debentures etc.
should be deducted from the value of assets for the determination of net value.
Steps in Net Assets Method
Steps Calculation Amt
1
2
3
4
5
Tangible, Real Gross Assets
Less: External Liabilities
Net assets
Less: Preference share capital
Surplus on liquidation
Less: share in surplus of Participating pref. share if any
Net assets available for equity shareholder
(Equity Shareholders Fund)
XXX
(XXX)
XXX
(XXX)
XXX
(XXX)
XXX
The net value of assets, determined so has to be divided by number of equity shares for finding
out the value of share. Thus the value per share can be determined by using the following
formula:
Value Per Share= (Net Assets-Preference Share Capital)

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Number of equity share
Example-
The following information is available from Tina Ltd. as at 31st March, 2009:
Capital :
1,000, 5% Preference Shares of Rs. 100 each fully paid Rs. 1,00,000
2,000 Equity Shares of Rs. 100 each fully paid Rs. 2,00,000
Reserve and Surplus Rs. 2,00,000
6% Debentures Rs.1,00,000
Current Liabilities Rs. 1,00,000
Assets: Fixed Assets Rs. 4,00,000
Current Assets Rs. 3,00,000
For the purpose of valuation of shares, fixed assets and current assets are to be depreciated by
10% ; Interest on debentures is due for six months; preference dividend is also due for the year.
Neither of these has been provided for in the balance sheet.
Calculate the value of each equity share under Net Asset Method.
Solution:
Net Assets Available To Equity Shareholders: Rs
Asstes
Fixed asstes (400000 – 10% of 400000) 360000
Current assets (300000 – 10% of 300000) 270000
Value of Asstes 630000
Less: Liabilities
Current Liabilities 100000
6% Debentures 100000
Add: Interest Outstanding
(Rs 100000*6/100*6/12) 3000
203000
5% Preference Share Capital 100000
Add: Arrear Dividend

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( Rs 100000 * 5%) 5000
105000
308000
Net Asstes available to Equity Shareholders 322000
No. of equity shares 2000
Value of each share under Net Assets Method:
Value per share = Net Assets available to Equity Shareholders / No. of Equity Shares = Rs.
3,22,000/ 2,000 = Rs. 161
2. Yield or Market Value Method of Valuation Of Shares
Equity shares may be purchased in a small lot for earning dividends. Such small
lots of equity shares are valued on the basis of expected dividends. If, on the other hand,
equity shares are acquired in a large number the purchaser is more concerned with the
total earning capacity of the company rather than the dividends paid. In such cases,
Equity shares are valued on the basis of the expected earnings of the company. Thus,
valuation of shares on ‘Yield’ basis may mean either
 Expected Dividend Basis  Expected Earning Basis
Expected Dividends Basis
Expected Dividend Basis may be used for valuation of Equity shares or Preference Shares.
Yield value per share = Expected rate of dividend * Paid up value of shares
Normal rate of dividend
Expected rate of Dividend = Profit available for equity dividends * 100
Paid up equity capital
Estimating future dividends
Steps Particulars Amt

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1.
2.
3.
4.
Future maintainable profits
Add : Non – trading Income
Less : Preference dividend XXX
Expected Transfers to Reserve XXX
Expected Transfers to Fund etc XXX
Expected Earning Available For Appropriation
XXX
XXX
XXX
(XXX)
XXX
PREFERENCE SHARE
Preference shares may also be valued by the Yield Method ( Expected Dividend Basis ) i.e
Expected rate of dividend / Normal rate of dividend * 100
The normal rate of dividend in the case of preference shares is generally lower than that in case
of the Equity Shares. This is because, Preference Shares have priority in respect of capital and
dividends.
Expected Earning Basis
Dividend basis of valuation of shares is based on the distribution of profits by way of dividends
in the short run. For valuation of shares under ‘expected earning basis’, the investor compares
the expected rate of earning with the normal rate of earnings.
Yield value per share = Expected rate of earning * Paid up value of shares
Normal rate of return
Expected rate of earning = Expected Earnings * 100
Paid up equity capital
Calculating Expected Earning
Steps Particulars Amt
1. Future maintainable profits XXX

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2.
3.
4.
Add : Non – trading Income
Less : Preference dividend
Expected Earning Available For Appropriation
XXX
XXX
XXX
Capitalisation of earnings
Another way to compute value of large block of shares is by capitalising the earnings at the yield
rate. This gives the capitalised Value of the earnings of the company. Capitalised value shows
the value of shares, which at the normal rate of return, will yield the amount of the expected
future earnings. The expected Earnings are capitalised in the following manner.
Capitalised Value of Earning = Expected Earnings * 100
Normal Rate of Return
Value of equity share = capitalised value of earning * paid up value per share / Paid up
capital
 FAIR VALUE METHOD
This is not a method, but a compromise formula which arbitrarily fixes the value of shares as the
Average of the values obtained by the Net Assets Method and the Yield Method.
Fair value = net assets method value + Yield method value
2
Example: The Balance Sheet of Suyash Ltd .as on 31-3-2003 is as follows:
Liabilities Rs Assets Rs
Equity Shares of Rs 10 each
10% Preference Shares of Rs
100 each
General Reserve
Profit & Loss Account
Creditors
Provision for Income tax
Proposed Dividend
5,00,000
1,000,00
1,00,000
50,000
1,10,000
40,000
60,000
9,60,000
Building
Machinery
Stock
Debtors
Bank
5,00,000
3,00,000
60,000
50,000
50,000
9,60,000

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The profits of the company after charging depreciation but before income - tax @ 40% were as
follows for last five years;
1991 - Rs 1,00,000
2000 - Rs 1,40,000
2001 - Rs 1,60,000
2002 - Rs 1,70,000
2003 - Rs 1,80,000
Reasonable Return on Equity funds in this line of business is considered to be 10%.
 Find out the value of equity share under the Net Asset or Intrinsic Method after valuing
goodwill on the basis of five year’s purchase of annual super profits.
 Also , ascertain the share value on the basis of profit earning capacity in relation to
 Average maintainable profits.
 Average dividend rate which was 8%, 9% ,7% for the last three years.
 Further calculate the number of shares to be purchased by an individual investor with an
amount of Rs 20,000 available for investment on the basis of appropriate fair value of the
relevant equity shares.
Solution :
 Computation of Goodwill
Capital Employed Rs Rs
Buildings 6,00,000
Machinery 2,50,000
Stock 60,000
Debtors 50,000
Bank 50,000
10,10,000
Less: Liabilities
Creditors 1,10,000
Provision for Income Tax 40,000
Proposed Dividend 60,000 2,10,000
Capital Employed 8,00,000

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Average Maintainable Profits (before income tax)
( 1,00,000 + 1,40,000 +1,60,000 + 1,70,000+1,80,000)
2 = 1,50,000
Less :Income tax @40% = 60,000 90,000
Normal profit =(10% of 8,00,000) 80,000
Super profit 10,000
Goodwill = Super Profit x 5
= Rs 10,000 x 5
= Rs 50,000
 Valuation of shares on Net Asset Basis
Capital employed 8,00,000
Add : Goodwill (as above ) 50,000
Assets available to Shareholders 8,50,000
Less : Preference share capital 1,00,000
Assets available to Equity Shareholder 7, 50,000
 Value of Equity Share = Assets available to Equity Shareholder /
Number of Equity Shares
7,50,000 / 50,000
= Rs 15 per share
 Valuation of share on Yield Basis
Average Equity Dividend = 8 + 9 +7 / 3
= 8%
Value of Equity Share = Average Dividend Rate x Paid up value
Normal Dividend Rate
= 8 x 10 / 10

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= Rs 8 per share
 Fair Value of Equity Share = 15 + 8 / 2
= Rs 11.50 per share
Number of shares which can be purchased = 20000 / 11.50
= 1,739 Equity Shares
VALUATION OF SHARES - CONCLUSION
Shares are valued according to various principles in different markets, but a basic premise is that
a share is worth the price at which a transaction would be likely to occur were the shares to be
sold. The liquidity of markets is a major consideration as to whether a share is able to be sold at
any given time. An actual sale transaction of shares between buyer and seller is usually
considered to provide the best prima facie market indicator as to the "true value" of shares at that
particular time.