This document discusses macro issues in valuation for mergers and acquisitions. It begins by defining valuation as determining the economic worth of an asset or company based on certain assumptions. It then discusses key valuation approaches such as income, market, and asset approaches. It also discusses factors that can cause valuations in M&A to depart from fair value, such as control premiums and synergies. Finally, it provides a case study showing how to calculate an exchange ratio in a merger between a listed steel company and unlisted power company based on valuations of both companies.

1. Macro Issues in Valuation
for M&A
By: Chander Sawhney
(FCA, CS, Certified Valuer (ICAI)
Asst. Vice President
SEBI REGISTERED (CAT -I) MERCHANT BANKER
Ggdd
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

2. AGENDA
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013
- Valuation;
- Mergers & Acquisition;
- Macro Issues in Valuation for Mergers & Acquisition;
- M&A Case Study

3. VALUATION
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

4. Valuation
 Valuation is the process of determining the “Economic Worth” of an Asset or Company
under certain assumptions and limiting conditions and subject to the data available on the
valuation date.
Source -International Valuation Standard Council
 Depends upon :
• Mergers
• IPO
• RBI
• Income Tax
• ESOP
• Companies Act
• SEBI
• Stock Exchange
Purpose Regulatory Accounting
• Purchase Price
Allocation
Dispute Resolution
• Company Law Board/
Courts
• Impairment /
Diminution
• Arbitration
• Mediation
• Acquisitions /
Investment
• Voluntary
Assessment
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

5. Key Facts of Valuation
The Value of a business, by whatever valuation method it is obtained, is not the selling price of the
business. Value is an economic concept based on certain data & assumptions, however Price is
what a Buyer is willing to pay keeping in consideration the Economic and Non Economic factors like
Emotions, Perception, Greed Etc which cannot be valued as such.
The Value is a subjective term and can have different connotations meaning different things to
different people and the result may not be the same, as the context or time changes.
Valuation is more of an art and not an exact science. The Art is Professional Judgment and Science
is Statistics. Mathematical certainty is neither determined nor indeed is it possible as use of
professional judgment is an essential component of estimating value
Though the value of a business can be objectively determined employing valuation approaches, this
value is still subjective, dependent on buyer and seller expectations and subsequent negotiations
and the Transaction happens at negotiated price only.
PRICE IS NOT THE SAME AS VALUE
TRANSACTION CONCLUDES AT NEGOTIATED PRICES
VALUATION IS HYBRID OF ART & SCIENCE
VALUE VARIES WITH PERSON, PURPOSE AND TIME
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

6. CASH FLOW
INVESTOR ASSIGN VALUE BASED ON THE CASH FLOW THEY EXPECT TO
RECEIVE IN THE FUTURE
- Dividends / distributions;
- Sale of liquidation proceeds;
VALUE OF A CASH FLOW STREAM IS A FUNCTION OF
-Timing of cash Receipt;
- Risk associated with the cash flow;
ASSETS
OPERATING ASSETS
- Assets used in the operation of the business including working capital, Property, Plant &
Equipment & Intangible assets;
- Valuing of operating assets is generally reflected in the cash flow generated by the business;
NON - OPERATING ASSETS
- Assets not used in the operations including excess cash balances, and assets held for
investment purposes, such as vacant land & Securities;
- Investors generally do not give much value to such assets and Structure modification may be
necessary
Key drivers of valuation
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

7. Broad Approaches to Valuation
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013
Applicability of a particular
approach depends upon
On whose behalf? – one
buyer vs another buyer, buyer
vs seller;
For what purpose? –
independent strategic
acquisition, group company
consolidation, cross border
transaction
When? – distress situation,
industry downturn, boom etc

8. MERGERS
&
ACQUISITION
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

9. M&A is primarily driven with motive of achieving Inorganic growth and Synergy i.e. the
potential additional value gain from combining two firms, either from operational or
financial sources.
However, certain studies have shown that most – but not all – M&A fail to deliver value
and bridge the price-value gap
One of the reasons is that the aggressive promoters in consultation with eager advisors
may result in pushing up the acquisition price; Resultantly, the value often get
transferred from acquirer’s shareholders to target company’s shareholders;
M & A
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

10. M&A
Mergers Acquisitions
Stock
Purchase
COURT PROCESS NON - COURT PROCESS
Types of M & A
SEBI
[TAKEOVER CODE]
Note: Asset Purchase under Acquisition is Ignored
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013
391-394 of
Companies Act

11. Valuation for Merger
APPLICABLE LAW FOR VALUATION FOR MERGER:
1.Companies Act, 1956 [Section 391- 394];
2.Fairness Opinion [Clause 24 (h) of the Listing Agreement];
3.SEBI Notification [CIR/CFD/DIL/5/2013], dated 4th
February, 2013
KEY HIGHLIGHTS OF SEBI NOTIFICATION
1. Approval of the Scheme by SEBI on recommendation of Stock Exchange;
2. Recommendation of Audit Committee of the Listed Co. on the valuation done by
Independent Chartered Accountant;
3. Uploading of the Valuation Report on the Website of Co. and Stock Exchange;
4. Filing of Complaint Reports;
5. Meeting of Shareholders through Postal Ballot and e-Voting;
None of the aforesaid laws provide for specific valuation approaches under Mergers;
“Valuation is generally the Starting Point of the M&A process”

12. Valuation for Merger.. Contd..
4. Judicial Pronouncements;
WHETHER VALUATION IS REQUIRED FOR MERGER?
In the matter of Shreya’s India (P) Ltd. v. Samrat Industries (P) Ltd. the Regional Director (RD)
raised an objection that no valuation report has been filed and that the exchange ratio for
amalgamation has not been worked out by an independent valuer.
“The Hon’ble High Court of Rajasthan overruled this objection and sanctioned the scheme of
amalgamation by holding that there was no legal or factual impediment to grant sanction to the
scheme of amalgamation.”
WHETHER ANY VALUATION METHODOLDY IS REQUIRED FOR MERGER?
Though there are no specific methodology prescribed for valuation under Merger, however
In Hindustan Lever Employees Union v. Hindustan Lever Ltd and Others, Bombay High
Court -
“accepted the ratio of 2:2:1 as Income, Market and Asset Approach on which the valuation
was based.”
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

13. Valuation for Acquisition
APPLICABLE LAW:
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
FREQUENTLY TRADED
SHARES
INFREQUENTLY
TRADED SHARES
Traded Turnover of Shares ≥ 10%
[In the Last Twelve Calendar Months preceding
the Month of Public Announcement (P.A.)]
Traded Turnover of Shares < 10%
[In the Last Twelve Calendar Months preceding
the Month of Public Announcement]
Method of Valuation
1.Highest Negotiated Price Per Share under agreement
attracting the obligation to make P.A.
2.The volume weighted avg. price paid or payable by
acquirer or PAC during the 52 Weeks;
3.The Highest Price paid or payable by acquirer or PAC in
last 26 Weeks;
4.Volume weighted average Market Price of Shares for a
period of 60 trading days
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE
FOR P.A.
Method of Valuation
1.Book value,
2.Comparable Trading Multiples;
Such other Parameters as are customary for
valuation of shares of such companies
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

14. Macro Issues of Valuation in
MERGERS & ACQUISITION
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

15. Fair Value in M&A ?
Fair Value is “The price at which an entity would change hands between a willing buyer and
willing seller, neither being under compulsion to buy or sell and both having reasonable
knowledge of all relevant facts.”
M&A VALUATIONS MAY HOWEVER DEPART FROM THEIR FAIR VALUES ON ACCOUNT OF:
oValuing Acquisition Targets on Standalone basis and Valuing them with Synergy
oDistress Sale Vs. Desperate Buy
oEmpirical Evidence
o Control Premiums and Minority & Marketability Discounts
oComparable Transaction Multiples (CTM) and Price of Recent Investments (PORI)
oCompetitive Positioning and Risk in Corporate Acquisitions
oValuation of Intangible Assets and Purchase Price Allocation (PPA)
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

16. Swap Ratio Valuation
• In case of a merger valuation, the emphasis is on arriving at the relative values of the
shares of the merging companies to facilitate determination of the swap ratio
– Hence, the purpose is not to arrive at absolute values of the shares of the companies
• The key issue to be addressed is that of fairness to all shareholders
– This is particularly important where the shareholding pattern and shareholders vary
between the two companies
• There are established legal precedence for merger valuation methodologies
– Valuer’s role is to incorporate case specific factors and use appropriate methodologies so
as to determine a fair ratio
– Usually, best to give weight ages to valuation by all methods
– Market price method and Earnings methods dominate.
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

17. • If the exchange ratio is set too high, there will be a transfer of wealth from the
bidding firm’s stockholders to the target firm’s stockholders.
• If the exchange ratio is set too low, there will be transfer of wealth from the
target firm to the bidding firm’s stockholders.
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Impact of Swap Ratio Valuation
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April,2013

18. “Beauty lies in the eyes of the beholder; valuation in those of the
buyer”
• An investor seeking to acquire control of a company is typically
willing to pay more than the current market price of the company.
Control premium is an amount that a buyer is usually willing to
pay over the fair market value of a publicly traded company to
acquire controlling stake in a company.
• Control can be direct (shareholding or Authority to appoint Board)
or indirect (veto power, casting vote etc)
• Research has shown that the control premium in India has ranged
from 20% to 37% in the past few years having median of 30%.
Control Premium and Takeover Bid
Financial
Year
No. of
Transactio
ns
Median
Premium
2006 25 37%
2007 29 20%
2008 38 26%
2009 44 29%
2010 22 31%
2011 42 32%
Total 228 30%
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

19. CASE STUDY
Calculation of Exchange
Ratio in M&A and
Independent Buyer-
Seller perspective
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

20. Features of Steel Company*
o Frequently Traded Listed Company
o Low Profit Margin, due to high Power Cost
o Running in Low Capacity Utilization due to poor supply of Power
Features of Power Company*
o Unlisted Company
o Company is implementing the Power Plant of 9.5 MW , The Production is expected to start with in
Year
Acquisition Rationale
o Location Advantage, both companies have their unit in same Location
o Synergistic benefits- (Captive Power Plant will reduce the Operating cost, because Steel Industry
is energy consuming)
o Tax benefit from the unabsorbed losses of Power Company
o Up the value chain
o Capacity utilization will increase in existing steel business, due easy availability of Power
*Common Promoter Group
Merger of a Unlisted Power Company into Listed Steel
Manufacturing Company
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

21. EXCHANGE RATIO & VALUATION –MERGER
• Valuation on Steel Company
• Valuation on Power Company
Valuation Method Rs Crores Weights Value of Company Weighted Value
Market Cap 2 100 200
Income Method 2 95 190
NAV 1 150 150
Fair Value of Company 108
Valuation Method Rs Crores Weights Value of Company Weighted Value
Market Cap 2 NA NA
Income Method^ 2 90 180
NAV 1 50 50
Fair Value of Company 76.67
^ considering 3 years forward earnings and 80-90% Capacity utilization basis
Merger of a Unlisted Power Company into Listed Steel
Manufacturing Company
ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th
April,2013

22. Pre Merger Shareholding of Steel Company
Category No of shares % Holding
Promoter 5,000,000 50%
Public 5,000,000 50%
Total 10,000,000 100%
Pre Merger Shareholding of Power Company
Category No of shares % Holding
Promoter 5,000,000 100%
Public - -
Total 5,000,000 100%
Post Merger Shareholding of Steel Company
Category No of shares % Holding
Promoter 12,099,074 71%
Public 5,000,000 29%
Total 17,099,074 100%
Independent Buyer-Seller Perspective
Valuation of Power business on as is
basis – Rs.55 crores
Assets Method
Earnings Method (Includes
premium for the license)
Valuation of Power business
taking into account synergies –
Rs. 70 crores
An independent Buyer would bid
an amount in excess of valuation
on standalone basis (Rs. 55
crores) and below Synergy
valuation (Rs.70 crores).
Acquisition Price would finally
depend on negotiations.
Pre and Post Shareholding
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April,2013

23. Any Specific Valuation Query may be mailed @
info@corporatevaluations.in / chander@indiacp.com
M: +91 9810557353; Ph: 011-40622252
W: www.corporatevaluations.in; corporateprofessionals.com
Mr. Chander Sawhney
(FCA, CS, Certified Valuer (ICAI)
Disclaimer:
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