48341855 merger-and-acquistion-3

CA.CS. Naveen. Rohatgi TYBMS: FINANCIAL MANAGEMNT

MERGER AND ACQUISITION :

Expansion
Expansion is a form of restructuring, which results in an increase in the size of the firm. It can
take place in the form of a merger, acquisition, tender offer; asset acquisition or a joint venture.

MERGER
Merger is defined as a combination of two or more companies into a single company. A merger
can take place either as an amalgamation or absorption.

Amalgamation
This type of merger involves fusion of two or more companies. After the amalgamation, the two
companies lose their individual identity and a new company comes into existence. A new firm
that is hitherto, not in existence comes into being. This form is generally applied to combinations
of firms of equal size.
Example: The merger of Brooke Bond India Ltd., with Lipton India Ltd., resulted in the
formation of a new company Brooke Bond Lipton India Ltd.

Absorption
This type of merger involves fusion of a small company with a large company. After the merger
the smaller company ceases to exist.
Example: The merger of Bank of Rajasthan with ICICI Bank. After Merger the Bank of
Rajasthan ceases to exist. The merger of Oriental Bank of Commerce with Global Trust Bank.
After the merger, GTB ceased to exist while the Oriental Bank of Commerce expanded and
continued.

TENDER OFFER
Tender offer involves making a public offer for acquiring the shares of the target company with a
view to acquire management control in that company.
Example: (1) Flextronics International giving an open market offer at Rs.548 for 20% of paid-up
capital in Hughes Software Systems.

(2) Astrazenca Pharmaceuticals AB, a Swedish firm, announced an open offer to acquire 8.4%
stake in Astrazenca Pharma India at a floor price of Rs.825 per share.

ASSET ACQUISITION
Asset acquisitions involve buying the assets of another company. These assets may be tangible
assets like a manufacturing unit or intangible assets like brands. In such acquisitions, the acquirer
company can limit its acquisitions to those parts of the firm that coincide with the acquirer¶s
needs.

Example: The acquisition of the cement division of Tata Steel by Laffarge of France. Laffarge
acquired only the 1.7 million tonne cement plant and its related assets from Tata Steel.
The asset being purchased may also be intangible in nature. For example, Coca Cola paid Rs.170
crore to Parle to acquire its soft drinks brands like Thums Up, Limca, Gold Spot, etc.

Yesterday's failures are today's seeds That must be diligently planted to be able to abundantly
harvest Tomorrow's success.


JOINT VENTURE
In a Joint Venture two companies enter into an agreement to provide certain resources towards
the achievement of a particular common business goal. It involves intersection of only a small
fraction of the activities of the companies involved and usually for a limited duration. The
venture partners according to the pre-arranged formula, share the returns obtained from the
venture. Usually the multinational companies use this strategy to enter into foreign market.

Example: The proposed joint venture between Tata Global Beverages (TGB) and PepsiCo,
announced this April to develop beverages in the health, is likely to begin with developing
affordable water. The possibility of pricing a one-litre bottle of water below Rs 10, perhaps even
around Rs 5.

Anil Ambani¶s Reliance Media World will form an equal joint venture with iconic American
media company CBS Corporation to launch a potentially disruptive network of television
channels under the Brand BIG CBS.

Take over : A take over generally involves acquisition of certain equity capital which enables
the acquirer to exercise control over the affairs of the company. Example United breweries
acquired majority stake in Deccan aviation Ltd. Mahindra Telecom takeover of Satyam. Other
example are Indal by Hindalco, IPCL by Reliance industries, VSNL by Tatas, Balco by Sterlite.
In theory the acquirer must buy more than 50% of the paid up capital of the acquired company to
enjoy complete control. In practice however effective control can exercised by holding between
20% to 40%. Since the remaining shareholders are small and scattered. Take over can be
hostile takeover or friendly takeover.

Hostile Takeover of a company against the wishes of current management and the board of
directors. This takeover may be attempted by another company or by HNI. If the price offered is
high enough, shareholders may vote to accept the offer even if management resists and claims
that the company is actually worth even more. If the acquirer raises the price high enough,
management may change its attitude, converting the hostile takeover into a friendly one.
Example The recently consummated Arcelor Mittal deal is an example of hostile takeover,
where the LN Mittal group acquired management control of Arcelor against the wishes of the
Arcelor management. India Cements takes over Rassi Cements in 1998.ITC Ltd takes over East
India Hotels Ltd in 2000
Friendly takeover: It is a takeover effected with the consent of the taken over company. In this
case there is an agreement between the managements of the two companies through negotiations
and the takeover bid may be with the consent of majority shareholders of the target company. It
is also known as negotiated takeover. Merger of Brooke Bond and Lipton has formed a new
entity Broke bond lipton with permission of its Board, it is termed as Friendly takeover

Contraction

Contraction is a form of restructuring, which results in a reduction in the size of the firm. It can
take place in the form of a Demerger, Partial sell off or equity carve-out.



Demerger : The act of splitting off a part of an existing company to become a new company,
which operates completely separate from the original company. Shareholders of the original
company are usually given an equivalent stake of ownership in the new company. A demerger is
often done to help each of the segments operate more smoothly, as they can now focus on a more
specific task. opposite of merger. For eg In this case, Bajaj limited has been demerged into (a)
Bajaj auto limited to focus on the auto business, (b) Bajaj Finserv Ltd (BFSL) to focus on wind
energy generation, insurance, consumer finance etc, and (c) Bajaj Holdings & Investment Ltd
(BHIL) to focus on investments and new business opportunities. For example Dabur India
demerged in july, 2003, Demerger of L & T cement division to a new entity CEMCO, Demerger
of Reliance industries in August 2005. In most of these cases, investors have gained in case of
demerer in case of RIL, shareholders got shares in four other ventures including telecom, power
and finance. All of these have done quite well post the separation. For 100 shares in RIL, they
received the same number of shares in Reliance Communication Ventures and RNRL, and a
smaller number in Capital and Energy holding companies.

Partial selloff :A partial sell off involves the sale of the business division or plant of one
company to another . It is the miiror image of a purchase of a business.

SPLIT-UPS:

In a split-up the entire firm is broken up in series of spin-offs, so that the parent company no
longer exists and only the new offsprings survive. A split-up involves the creation of a new class
of stock for each of the parent¶s operating subsidiaries, paying current shareholders a dividend of
each new class of stock, and then dissolving the parent company. Stockholders in the new
companies may be different as shareholders in the parent company may exchange their stock for
stock in one or more of the spin-offs.
Example: The Andhra Pradesh State Electricity Board (APSEB) was split-up in 1999 as part of
the Power Sector reforms. The power generation business and the transmission and distribution
business was transferred to two separate companies called APGENCO and APTRANSCO
respectively. APSEB ceased to exist as a result of the split-up.

EQUITY CARVE-OUT
A Equity carve out, a parent company sells a portion of its equity in a wholly owned
subsidary.The sale may be a general public or strategic investor.

Other forms of restructing

LEVERAGE BUYOUT
Leveraged buyout is a financing technique where debt is used in the acquisition of a company.
The term is often applied to a firm-borrowing fund to buy-back its stock to convert from a
publicly owned to a privately owned company. A management buyout is a LBO. in which
managers of the firm to be taken private are also equity investors. Tata Steel's acquisition of
Corus is a classic example of leveraged buyout. Typically, in such a buyout as much as 90 per
cent of the funds required for the takeover are mobilised through borrowings principally through
junk bonds carrying high interest.



Disinvestment/ Privitisation: Privatisation involves transfer of ownership (represnted by equity
shares)partial or total of public enterprises from the government to individual and non-govt
institutions. the government will look into the possibility of disinvestment in Oil and Natural Gas
Corporation and Indian Oil Corporation in the current fiscal itself. However, disinvestment
secretary Sumit Bose said right now there is nothing on the cards.
Aiming to raise Rs 40,000 crore (Rs 400 billion) through disinvestment this fiscal, so far, the
government could mobilise only Rs 1,000 crore (Rs 10 billion) in Satluj Jal Vidyut Nigam.
Besides, the government expects to mop up Rs 977 crore (Rs 9.77 billion) from the 10 per cent
disinvestment in the state-run Engineers India . "We are hopeful to meet the Rs 40,000 crore
disinvestment target," Bose said.
Further said divestment in PowerGrid, Coal India, Hindustan Copper , SAIL , Manganese Ore,
is likely in the current fiscal. But this would not add up to Rs 40,000 crore so there could be
more in the list selloff list for the current fiscal. "As and when we will get the Cabinet approval
for other companies, it would be communicated," Bose added.
Finance Minister Pranab Mukherjee had set a target of mobilising Rs 40,000 crore this fiscal
from the divestment process to part fund the social sector investment and bridge the widening
fiscal deficit.
Last fiscal the government had raised Rs 25,000 crore (Rs 250 billion) from divestment in Oil
India, NHPC, NTPC, NMDC and REC.

TYPES OF MERGERS
(i) Horizontal mergers, (ii) Vertical mergers, and (iii) Conglomerate mergers.

Horizontal Merger
A horizontal merger involves a merger between two firms operating and competing in the same
kind of business activity. The main purpose of such mergers is to obtain economies of scale of
production. The economies of scale is obtained by the elimination of duplication of facilities and
operations and broadening the product line, reduction in investment in working capital,
elimination of competition in a product, reduction in advertising costs, increase in market share,
exercise of better control on market, etc.
Horizontal mergers result in decrease in the number of firms in an industry and hence such type
of mergers make it easier for the industry members to join together for monopoly profits.

The merger of Centurion Bank and Bank of Punjab, Oriental Bank of Commerce and GTB in
Banking Sector, Tata Industrial Finance Ltd., with Tata Finance Ltd., in Finance Sector. A big
merger between Holicim and Gujarat Ambuja Cement Ltd., with Associated Cement companies
is also a merger in the manufacturing industry. Essar-Hutch and BPL¶s mobile merger, VSNL¶s
acquisition of Chennai based Dishnet DSL¶s Internet Service Provider (ISP) are some other
horizontal mergers that took place recently.


Vertical Mergers

A vertical merger involves merger between firms that are in different stages of production or
value chain. They are combination of companies that usually have buyer-seller relationships. A
company involved in a vertical merger usually seeks to merge with another company or would
like to take over another company mainly to expand its operations by backward or forward
integration. In vertical combination, the merging company would be either a supplier or a buyer
using its product as an intermediary material for final production.
Firms integrate vertically between various stages due to reasons like technological economies,
elimination of transaction costs, improved planning for inventory and production, reconciliation
of divergent interests of parties to a transaction, etc. Anti-competitive effects have also been
observed as both the motivation and the result of these mergers.
Examples: Nirma¶s bid for Gujarat Heavy Chemical (backward integration) or Hindalco
Bidding for Pennar Aluminium (forward integration). Videocon Group¶s acquisition of
Thomson¶s Colour Picture Tube Business in China.

Conglomerate Mergers
Conglomerate mergers involve merger between firms engaged in unrelated types of business
activity. The basic purpose of such combination is utilization of financial resources. Such type of
merger enhances the overall stability of the acquirer company and creates balance in the
company¶s total portfolio of diverse products and production processes and thereby reduces the
risk of instability in the firm¶s cash flows. For example BankCorp of America- Hughes
Electronics.

Advantages of Mergers & Acquisitions.

# Economies of Scale: This generally refers to a method in which the average cost per unit is
decreased through increased production, since fixed costs are shared over an increased number of
goods. In a layman¶s language, more the products, more is the bargaining power. This is possible
only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate
departments or operation, thereby lowering the cost of the company relative to theoretically the
same revenue stream, thus increasing profit. It also provides varied pool of resources of both the
0combining companies along with a larger share in the market, wherein the resources can be
exercised.

# Increased revenue /Increased Market Share: This motive assumes that the company will be
absorbing the major competitor and thus increase its power (by capturing increased market
share) to set prices.

# Cross selling: For example, a bank buying a stock broker could then sell its banking products
to the stock brokers customers, while the broker can sign up the bank¶ customers for brokerage
account. Or, a manufacturer can acquire and sell complimentary products.

# Corporate Synergy: Better use of complimentary resources. It may take the form of revenue
enhancement (to generate more revenue than its two predecessor standalone companies would be


able to generate) and cost savings (to reduce or eliminate expenses associated with running a
business).

# Taxes : A profitable can buy a loss maker to use the target¶s tax right off i.e. wherein a sick
company is bought by giants.

# Geographical or other diversification: this is designed to smooth the earning results of a
company, which over the long term smoothens the stock price of the company giving
conservative investors more confidence in investing in the company. However, this does not
always deliver value to shareholders.

# Resource transfer: Resources are unevenly distributed across firms and interaction of target and
acquiring firm resources can create value through either overcoming information asymmetry or
by combining scarce resources. Eg: Laying of employees, reducing taxes etc.

# Improved market reach and industry visibility - Companies buy companies to reach new
markets and grow revenues and earnings. A merge may expand two companies' marketing and
distribution, giving them new sales opportunities. A merger can also improve a company's
standing in the investment community: bigger firms often have an easier time raising capital than
smaller ones.

P6ROCEDURE OF MERGER AND ACQUISITION:

The Act lays down the legal procedures for mergers or acquisitions :-

y Permission for merger:- Two or more companies can amalgamate only when the
amalgamation is permitted under their memorandum of association. Also, the
acquiring company should have the permission in its object clause to carry on the
business of the acquired company. In the absence of these provisions in the
memorandum of association, it is necessary to seek the permission of the
shareholders, board of directors and the Company Law Board before affecting the
merger.
y Information to the stock exchange:- The acquiring and the acquired companies
should inform the stock exchanges (where they are listed) about the merger.
y Approval of board of directors:- The board of directors of the individual
companies should approve the draft proposal for amalgamation and authorize the
managements of the companies to further pursue the proposal.
y Application in the High Court:- An application for approving the draft
amalgamation proposal duly approved by the board of directors of the individual
companies should be made to the High Court.
y Shareholders' and creators' meetings:- The individual companies should hold
separate meetings of their shareholders and creditors for approving the
amalgamation scheme. At least, 75 percent of shareholders and creditors in
separate meeting, voting in person or by proxy, must accord their approval to the
scheme.



y Sanction by the High Court:- After the approval of the shareholders and
creditors, on the petitions of the companies, the High Court will pass an order,
sanctioning the amalgamation scheme after it is satisfied that the scheme is fair
and reasonable. The date of the court's hearing will be published in two
newspapers, and also, the regional director of the Company Law Board will be
intimated.
y Filing of the Court order:- After the Court order, its certified true copies will be
filed with the Registrar of Companies.
y Transfer of assets and liabilities:- The assets and liabilities of the acquired
company will be transferred to the acquiring company in accordance with the
approved scheme, with effect from the specified date.
y Payment by cash or securities:- As per the proposal, the acquiring company will
exchange shares and debentures and/or cash for the shares and debentures of the
acquired company. These securities will be listed on the stock exchange.

Due Diligence
The basic function of due diligence is to assess the benefits and the costs of a proposed
acquisition by inquiring into all relevant aspects of the past, present and the predictable future of
a business to be purchased. Due diligence is of vital importance to prevent ³unpleasant surprises´
after completing the acquisition. The due diligence should be thorough and extensive. Both the
parties to the transaction should conduct their own due diligence to get the accurate assessment
of potential risks and rewards. Generally, it is a process of enquiry and investigation about
proposed merger deal. It is a judgment process of the deal. The due diligence consists of five
strands, viz.,
y The verification of assets and liabilities.
y The identification and quantification of risks.
y The protection needed against such risks which will in turn feed into the negotiations.
y The identification of synergy benefits.
y Post-acquisition planning.
Due Diligence Topics and-their Focus on Enquiry
Due Diligence Focus of Enquiries Expected Results
Topics
Financial Historical records, review of Confirms underlying profits.
management and systems. Provides basis for valuation.
Legal Various contractual Acts in the Warranties and indemnities,
country. validation of all existing contracts,
sale and purchase agreement.
Commercial Market conditions, competitive Sustainability of future profits,
position and target¶s commercial planning, decision on strategy to be
prospects. adopted for the combined business.
Tax Existing tax levels, liabilities and Avoid any unforeseen tax
arrangements. liabilities, opportunities to optimize
position of combined business.
Management Management quality, Identification of key integration
organizational structure issues, outline of new structure for



the combined business.

REASONS FOR FAILURE OF MERGE AND ACQUISITIONS
There are various reasons why mergers and acquisitions fail. The most common of these reasons
are:

Payment of High Price: In a competitive bidding situation, a company may tend to pay more.
Often highest bidder is one who overestimates value out of ignorance. Though he emerges
as the winner, he happens to be in a way the unfortunate winner. This is called winners
curse hypothesis. When the acquirer fails to achieve the synergies required compensating
the price, the M&As fails. More you pay for a company, the harder you will have to work to
make it worthwhile for your shareholders. When the price paid is too much, how well the
deal may be executed, the deal may not create value.

Culture Clash: Lack of proper communication, differing expectations, and conflicting
management styles due to differences in the corporate culture contribute to failure of
implementation plan and hence failure of the merger.

One of the reasons for the dismal performance of the Warner Hindustan Parke Da is merger was
the absence of a well defined strategy to merge the two cultures Both were well-established
companies with strong but different cultures While Parke Davis was a people driven company
with a participative culture Warner Hindustan was a more task-focused and formal organization
Even though the merger focused on rationalizing the facilities, restructuring and allocation of
designations, the cultural and procedural issues were left unattended. The differences in the
cultural orientations and operating rules created many operational bottlenecks and resulted in
lowering of performance.

Size Issues A mismatch in the size between acquirer and target has been found to lead to
poor acquisition performance. Many acquisitions fail either because of 'acquisition
indigestion' through buying too big targets or failed to give the smaller acquisitions the time
and attention it required.

Lack of research

Acquisition requires gathering a lot of data and information and analyzing it. It requires
extensive research. A carelessly carried out research about the acquisition causes the
destruction of acquirer's wealth.

Overstated Synergies: Acquisition can create opportunities of synergy by increasing revenues,
reducing costs, producing net working capital and improving the investment intensity.
Overestimation of such synergies may lead to a failure of the mergers.

Inconsistent Strategy: For mergers and acquisitions to succeed they must be driven by a sound
business strategy. Inaccurate assessment of the strategic benefits of the merger may lead to its
failure.



Poor Business Fit: When the product or service does not naturally fit into the acquirer¶s
marketing, sales, distribution systems or geographic requirement, it no longer remains an ideal
fit. Such a firm delays efficient integration and may also lead to the failure of the mergers.

Inadequate Due Diligence: The process of due diligence helps in detecting any financial and
business risks that the buyer might inherit from the seller. Inadequate due diligence results in the
failure of the merger.

Over Leverage: Cash acquisitions frequently result in the acquirer assuming too much debt.
Future interest costs consume a great portion of the acquired company¶s earnings. An even more
serious problem results when the acquirer resorts to cheaper short-term financing and then has
difficulty refunding on a long-term basis. A well-planned capital structure is critical for a
successful merger.

Boardroom Split: When mergers are structured with 50/50 board representation or substantial
representation from the target, care must be taken to determine the compatibility of the directors
following the merger. A failure to focus on this aspect of the merger can create or worsen a
culture clash and slow down or prevent integration.

Regulatory Delay: The announcement of a merger is a dislocating event for the employees and
other constituents of one or both companies. It is customary to have detailed plans to deal with
potential problems immediately following an announcement. However, when there is the
possibility of regulatory delay, the risk of substantial deterioration of the business increases as
time goes on, with valuable employees and customer and supplier relationships being lost. This
loss is a key consideration in evaluating whether a particular merger should be undertaken.

Valuation :

The principal incentive for a merger is that the business value of the combined business is
expected to be greater than the sum of the independent business values of the merging
entities. The difference between the combined value and the sum of the values of individual
companies is the synergy gain attributable to the M&A transaction. Hence,
Value of acquirer + Stand alone value of Target + Value of Synergy = Combined Value.
There is also a cost attached to an acquisition. The cost of acquisition is the price premium
paid over the market value plus other costs of integration. Therefore, the net gain is the
value of synergy minus premium paid.
Suppose VA = Rs. 200, VB = Rs. 50 and VAB = Rs. 300, where VA and VB are the values of
companies A and B before merger respectively and VAB is the combined value after merger.
Therefore, Synergy = VAB ± ( VA + VB ) = Rs. 50.
If the premium is Rs. 20,
Net gain from merger of A and B will be Rs. 30 (i.e. Rs. 50 ± Rs. 20). One of the essential
steps in M&A is the valuation of the Target Company. Analysts use a wide range of models
in practice for measuring the value of the Target firm. These models often make very
different assumptions about pricing, but they do share some common characteristics and
can be classified in broader terms. There are several advantages to such a classification : it
is easier to understand where individual models fit into the bigger picture, why they provide
different results and where they have fundamental errors in logic.



There are only three approaches to value a business or business interest. However, there
are numerous techniques within each one of the approaches that the analysts may consider
in performing a valuation.
Income Approach
Under this approach two primary used methods to value a business interest include :
a) Discounted Cash flow method
b) Capitalized Cash flow method
Each of these methods depend on the present value of an enterprise¶s future cash flows.

Discounted Cash flow Technique
The Discounted Cash flow valuation is based upon the notion that the value of an asset is
the present value of the expected cash flows on that asset, discounted at a rate that reflects
the riskiness of those cash flows. The nature of the cash flows will depend upon the asset :
dividends for an equity share, coupons and redemption value for bonds and the post tax
cash flows for a project. The Steps involved in valuation under this method are as under :

Step I : Estimate free cash flows available to all the suppliers of the capital viz. equity
holders, preference investors and the providers of debt.

Step II : Estimate a suitable Discount Rate for acquisition, which is normally represented
by weighted average of the costs of all sources of capital, which are based on the market
value of each of the components of the capital.

Step III: Cash flows computed in Step I are discounted at the rate arrived at in Step II.

Step IV : Estimate the Terminal Value of the business, which is the present value of cash
flows occurring after the forecast period.
TV = CFt (1+ g ) ,
k-g
where CFt is the cash flow in last year,
g is constant growth rate and
k is the discount rate
Step V : Add the present value of free cash flows as arrived at in Step III and the Terminal
Value as arrived at in Step
IV. This will give the value of firm.
Step VI: Subtract the value of debt and other obligations assumed by the acquirer to arrive
at the value of equity.
4.1.2 Capitalized Cash flow Technique
The Capitalized Cash flow technique of income approach is the abbreviated version of
Discounted Cash flow technique where the growth rate (g) and the discount rate (k) are
assumed to remain constant in perpetuity. This model is represented as under :
Value of Firm = Net Cash flow in year one
(k±g)
Market approach:

The market approach to business valuation has its origin in the economic principle of
substitution which says, ³Buyers would not pay more for an item than the price at which
they can obtain an equally desirable substitute.´ The market price of the stocks of publicly
traded companies engaged in the same or similar line of business can be a valid indicator of
value when the transactions in which stocks are traded are sufficiently similar to permit a



meaningful comparison. The difficulty lies in identifying public companies that are
sufficiently comparable to the subject company for this purpose.
Suppose a company operating in the same industry as ABC with comparable size and other
situations has been sold at Rs. 500 crores in last week provides a good measurement for
valuation of business. Considering the circumstances, value of the business of ABC should
be around Rs. 500 crores under market approach.

Asset approach:

The first step in using the assets approach is to obtain a Balance Sheet as close as possible
to the valuation date. Each recorded asset including intangible assets must be identified,
examined and adjusted to fair market value. Now all liabilities are to be subtracted, again at
fair market value, from the value of assets derived as above to reach at the fair market
value of equity of the business. It is important to note here that any unrecorded assets or
liabilities should also be considered while arriving at the value of business by the assets
approach.
None of the above methods is the best or none of them is the worst but each one has its
own advantages and view points different from others. All these methods should be used in
combinations to arrive at proper valuation of the business.

MERGER AND ACQUISTION

Q1) A Ltd. is considering the acquisition of B Ltd. Relevant financial information is given
below.
A Ltd. B Ltd.
Equity (No. of shares) 10,00,000 6,00,000
NPAT 50,00,000 18,00,000
Market Price Rs. 42 Rs.28

a. What is the present EPS of both the companies?
b. What should be P/E ratio of both the companies
c. If the proposed merger takes place what would be the new earnings per share for XYZ Ltd.
(assuming the merger takes place by exchange of equity shares and the exchange ratio is
based on the current market prices)?
d. What should be the exchange ratio if ABC Ltd. want to ensure the same earnings to members
as before the merger took place?

Q2) OMEGA Ltd. is considering the acquisition of SOUND Ltd. Relevant financial information
is given below.
OMEGA.LTD SOUND LTD
NPAT Rs. 2,00,000 Rs. 60,000
Equity (No. of shares) 40,000 10,000



1. What is the present EPS of both the companies?
2. What should be P/E ratio of both the comapnies
3. If the proposed merger takes place what would be the new earnings per share for XYZ
Ltd. (assuming the merger takes place by exchange of equity shares and the exchange
ratio is based on the P/E
4. What should be the exchange ratio if ABC Ltd. want to ensure the same earnings to
members as before the merger took place?
Q3) Sound Ltd. is considering the acquisition of Light Ltd. Relevant financial information is
given below.
SOUND.LTD LIGHT LTD
NPAT Rs. 450 Lacs Rs. 90 Lacs
Equity (No. of shares) Rs. 90 Lacs Rs. 18 Lacs

a. What is the present EPS of both the companies?
b. What should be P/E ratio of both the comapnies
c. If the proposed merger takes place what would be the new earnings per share for XYZ
Ltd. (assuming the merger takes place by exchange of equity shares and the exchange
ratio is based on the EPS)
d. What should be the exchange ratio if ABC Ltd. want to ensure the same earnings to
members as before the merger took place?

4) A Ltd. is considering the acquisition of B Ltd. Relevant financial information is given below.
A LTD B LTD
NPAT Rs 75 Lacs Rs. 40 Lacs
Equity (No. of shares) 40,00,000 32,00,000
Market Price Rs. 18.75 Rs.7.5

1. What is exchange ratio.
2. How many new shares would be issued
a. if the exchange takes place as per market price
b. if the exchange takes place as per EPS
c. if the exchange takes place as per P/E.
3. what are earnings per share of the surviving company immediately following the merger.

5) P wants to acquire Q by exchange 0.5 shares for every share of Q. The relevant
information data is given as below:

P LTD Q LTD
NPAT Rs 9,00,000 Rs. 1,80,000
Equity (No. of shares) 3,00,000 90,000
Market Price Rs.36 Rs.20



Calculate:
a. EPS and P/E of both firms before acquisition
b. The no of equity shares required to be issued by P for acquiring Q
c. EPS of P after acquisition
d. MPS of P after acquisition assuming its P/E multiple remains unchanged
e. Market value of the merged entity

6) A Ltd is considering the acquisition of B Ltd. Relevant financial information is given
below.

A LTD B LTD
NPAT Rs 75,00,000 Rs. 25,00,000
Equity (No. of shares) 40 Lac 20 Lac
P/E 10 5

Answer the following question:

a. What is market price of each company.
b. What is the market capitalization of each company
c. If P/E of A Ltd changes to 7.5, what is the market price of A Ltd.
d. Does the market value of A Ltd change
e. What would be ration based on MPS (Take the revised MPS)

HOMEWORK SECTION:

Q1) Ajay Limited wants to acquire Vijay Limited. Exchange ratio is decided as 14/39 i.e. 0.359
The following financial data is available:
Ajay Vijay
NPAT Rs 9,00,000 Rs 1,80,000
MPS Rs 36 Rs 20

Calculate :
a. EPS and PE ratio of both the firms before acquisition
b. The number of shares required to be issued by Ajay for acquiring Vijay.
c. EPS of Ajay after Acquisition
d. Market price of the share of Ajay after acquisition ; assuming P/E ratio remains
unchanged
e. The market value of the merged entity

Q2) XYZ Ltd is planning to acquire PQR Ltd . Since the current EPS is Rs 5 for ABC company,
the management is keen to get EPS of Rs 6 at least post meger. They seek your advice on the
possible exchange ratio that would give the merged entity an EPS of Rs 6. It is also provided that
the acquisition would result in the Synergy of 200 Lac. The following financial data is given:



XYZ LTD PQR LTD
EPS Rs 5 per share Rs 4 per share
MPS Rs 100 Rs 70

Q3)X Ltd is considering the acquisition with Y Ltd. With stock . Relevant financial information
is given below:

X LTD Y LTD
Present Earnings (Amount Rs in Lacs) Rs 75 Rs 40
EPS 1.875 1.25
P/E ratio 10 6
Market price per share Rs 18.75 Rs 7.5

X Ltd is thinking of four possibilities of the exchange ratio:

a. Exchange Ratio as per market price
b. To offer a premium of 30% over the market price of Y Ltd.
c. Exchange ratio as per EPS.
d. Exchange Ratio as per P/E

In each of the case, calculate

1. Ratio of exchange
2. EPS of the post merger
3. Number of new shares to be issued

Q4) Large Company is considering the acquisition of small company in a stock ±for- stock
transaction in which target company is valued at Rs 85 for each of its common stock. The
acquiring company does not expect any change in P/E ratio multiple after merger and choose to
value the target company conservatively by assuming no earning growth due to synergy.

Calculate:

1. The purchase price premium
2. The exchange ratio
3. The no of new shares issued by the acquiring company
4. Post merger EPS of the combined entity
5. Premerger EPS of the acquiring company
6. Pre merger P/E ratio
7. Post merger share price

The following additional information is available:



Large Small
Earning Rs 2,50,000 Rs 72,500
MPS Rs 52 Rs 64

Q5) AIM Ltd is considering merger with MAX Ltd . There is no synergy gains form the
merging. Complete the following table if AIM wishes an EPS of Rs 2.80 per share after merger .

Particulars AIM LTD MAX LTD MERGED
ENTITY
Earnings after tax Rs 0.1 million Rs 0.25 million ?
Outstanding of shares 50,000 1,00,000 ?
EPS (Rs) 2 2.5 2.8
P/E ratio 10 5 ?
Market price Rs 20 Rs 12.5 ?
Total market value ? ? ?

(a) Compute the above table
(b) Calculate the exchange viz no of shares of AIM given to XYZ shareholder
(c) What is the cost of merger to AIM Ltd.


48341855 merger-and-acquistion-3

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