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Merger & Acquisition

a) Threat of new entrants b) Threat of substitute products and survives c) Rivalry amongst existing organizations within the industry d) Bargaining power of suppliers e) Bargaining power of customers

Merger & Acquisition

a) Strategic Motives b) Financial Motives


c) Organizational Motives

Merger & Acquisition


Strategic Motives 1) Expansion and growth & diversification 2) Dealing with entry of MNCs 3) Economies of Scales 4) Synergy 5) Market Penetration 6) Market Leadership 7) Backward/Forward Integration 8) Arresting downward trend of a particular industry

Merger & Acquisition


Financial Motives 1) Deployment of surplus fund 2) Fund raising capacity 3) Increase in MC and MV 4) Tax Planning 5) Operating economy 6) Asset Tripping 7) Bootstrapping 8) Revival of units

Merger & Acquisition


Organisational Motives 1) Superior management 2) Ego satisfaction 3) Removal of inefficient management

Merger & Acquisition


Ex. Annual cash flows generated by two companies A ltd and B Ltd in same line of trade are Rs. 10 lakh and Rs. 5 lakh respectively. If the two firms merge, a post-tax cost savings of Rs. 1 lakh every year is anticipated. A ltd proposes to absorb B Ltd on payment of cash consideration of Rs. 54 Lakh. The cost of capital is 10%. Show allocation of merger gains.

Merger & Acquisition


Ex. A Ltd plans to acquire B Ltd. Show allocation of merger gains using data given below: A Ltd B Ltd Pre-merger market price per Rs. 50 Rs.20 Share Number of share 10 lakh 5 lakh The expected merger gain is Rs. 100 lakh. A ltd offered 1 share for every 2 shares of B Ltd. (i.e 1:2 exchange ratio)

Merger & Acquisition


Impact of Price Earning Ratio Maximum and Minimum Exchange Ratio Ex. The market value of two companies A Ltd. and B Ltd. are Rs. 170 lakh and Rs. 68 lakh respectively. The share capital of A Ltd. consists of 3.4 lakh Rs. 10 ordinary shares and that of B Ltd. consists of 2 lakh ordinary shares. A Ltd. takes over B Ltd. The pre-merger earnings are Rs. 17 lakh for A Ltd and Rs. 8.5 for B Ltd. The merger is expected to produce a positive synergy of Rs. 2.5 lakh in form of post tax cost saved. The pre-merger P/E ratios are 10 for A Ltd. and 8 for B Ltd. The possible combined P/E ratios are 9 and 10. Required a) Minimum combined P/E ratio to justify merger b) Probable exchange ratio of shares if combined P/E is 9.

Merger & Acquisition

Bootstrapping
Ex. 1
A Ltd. Proposes to absorb T ltd by exchange on the basis of current market price. The expected combined P/E ratio is 10. \
PAT (Rs. In Lakh) Number of shares outstanding P/E Ratio A Ltd. 30.00 1 10 B Ltd. 7.50 0.3 8

(Lakh)

Compute and comment on pre and post-merger EPS. Also show allocation of merger gain.

Merger & Acquisition Bootstrapping


Ex. 2 X Ltd. is contemplating the purchase of Y Ltd.. It has 3,00,000 shares having a market price of Rs. 30 per share, while Y Ltd. Has 2,00,000 shares selling at Rs. 20 per share. The EPS are Rs. 4.00 and Rs. 2.25 for X Ltd. And Y ltd. Respectively. Managements of both companies are discussing two alternative proposals for exchange of share as indicated below: i) in proportion to the relative earnings per share of two companies ii) 0.5 share of X Ltd. For one share of Y Ltd. Calculate the EPS after merger under two alternatives; and show the impact on EPS for the shareholders of two companies under both the alternatives.

Merger & Acquisition


Calculation of Accretion/ Dilution in the share-holding Following are the financial statements for A Ltd. and B Ltd. for the current financial year. Both the firms operate in the same industry. Balance Sheets
A Ltd. Total CA Total FA (net) Equity Capital RE 14% Debentures Total CL 14,00,000 10,00,000 24,00,000 10,00,000 2,00,000 5,00,000 7,00,000 3,00,000 4,00,000 B Ltd. 10,00,000 5,00,000 15,00,000 8,00,000

24,00,000

15,00,000

Merger & Acquisition


Income Statements
A Ltd. Net Sales COGS GP Operating Expenses Interest 34,50,000 27,60,000 6,90,000 2,00,000 70,000 B Ltd. 17,00,000 13,60,000 3,40,000 1,00,000 42,000

EBT Tax (50%)


EAT Additional information: Number of equity shares D/P MPS (Rs.)

4,20,000 2,10,000
2,10,000 1,00,000 40% 40

1,98,000 99,000
99,000 80,000 60% 15

Merger & Acquisition


Assume that the two firms are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms and are required to: 1. Decompose the share prices of both the companies into EPS and P/E components and also segregate there EPS figures into ROE and book value/ intrinsic value per share (BVPS) components. 2. Estimate future EPS growth rates for each firm. 3. Based on Expected operating synergies, A Ltd. estimates that the intrinsic value Bs equity share would be Rs. 20 per share of its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by A Ltd. to B Ltds shareholders. Based on your analysis in parts (i) and (ii) would you expect the negotiated terms to be closer to the upper or the lower exchange ratio limits? Why? 4. Calculate the post-merger EPS based on an exchange ratio of 0.4:1 being offered by A Ltd. Indicate the immediate EPS accretion or dilution,

Merger & Acquisition


if any, that will occur for each group of shareholders. 5. Based on a 0.4:1 exchange ratio, and assuming that As pre-merger P/E ratio will continue after the merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger market prices.
(C.S. Final June 1998)

Merger & Acquisition


Valuation of shares and post merger balance sheet The following information is available from Modi Ltd and Mehta Ltd as on 31.12.2007. They agree to amalgamate and to form a new company Modi-Mehta Ltd. The authorized capital of the new company will consist of Rs 10 equity shares.
Modi Ltd (Rs.) Fixed Assets less Depn. Investment 10% Govt. Bond 12% Govt. Bond Inventories Accounts Receivables Cash & Bank 62,440 49,560 7,360 10,000 8,000 42,840 34,080 3,920 148,400 1,11,040 Mehta (Ltd.) 59,560

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2,000
2,42,400

Merger & Acquisition


Modi Ltd (Rs.) Paid-up Capital of Rs. 10 shares 1,60,000 Mehta (Ltd.) 80,000

Reserve & Surplus


Accounts Payable

52,000
30,400 2,42,400

28,000
40,400 1,48,400

The net profits (after tax) of the two companies revealed as below:
YEAR 2005 2006 2007 Modi Ltd (Rs.) 30,000 28,000 26,000 Mehta (Ltd.) 16,000 18,000 20,000

Merger & Acquisition


Assume 11% return on capital Goodwill to be valued at 4 years and 2 years purchase of super profits of Modi Ltd. and Mehta Ltd. respectively. The prices of 10% and 12% Govt. Bond as at 31.12.2007 are 95 each and 101 each (F.V. Rs. 100). Business control is maintained same as before. The cash components of the purchase as required for payment to the vendors has to be met out of Bank O/D. Tax rate is 50%.
Required: a) Value of Goodwill and Purchase Consideration b) Opening Balance of Modi-Mehta Ltd.

Merger & Acquisition


Maximum Purchase Consideration Estimated operating CF for the forecast period and Terminal Value Discounting rate Non-operating assets Special liabilities Prob: 1 On 01/04/XX a consortium of investors is considering floating of a company to take over existing business of A Ltd. They furnish following estimated data in respect of the company and ask you to compute maximum purchase consideration they can quote. 1) Expected EBIT Rs. 30 lakh each for a forecast period of 10 years at the present conditions. 2) The acquisition is expected to result in a positive synergy of Rs. 5 (before tax) lakh p.a. for 10 years 3) Annual depreciation is Rs. 4 lakh

Merger & Acquisition


4) 5) 6) 7) 8) Value of non-operative assets taken over Rs. 9.5 lakh Additional liability arising on acquisition Rs. 3.6 lakh Expected terminal value is Rs. 300 lakh The post-tax overall cost of capital of A Ltd. is 10%. Tax rate is 40%.

Merger & Acquisition


Balance Sheet of Platinum Ltd. as at 31/03/2008
Liabilities
Equity Share Capital: Fully paid up shares of Rs. 100 each General Reserve Profit and Loss Account Sundry Creditors Provision for Income-tax
Rs. In lakh

Assets
Land and Building

Rs. In lakh

110 130 20 48 88 52 12 460

200 Plant and Machinery Patent and Trade Marks 40 Stock 32 Sundry Debtors 128 Bank Balance 60 Preliminary Expenses 460

The market values of assets (Rs. In lakh ):


Land & Building 240 Goodwill 160 Plant 120

Out of the total debtors, Rs. 8.00 lakhs are considered bad.

Merger & Acquisition


The last two years and current years PAT are Rs. 92 lakh, 88 lakh and 96 lakh. The company follows the practice of transferring 25% to General Reserve. It has been decided that industry average would be considered as normal rate of return. The average distributable return of the similar types of companies is 10% of the value of their shares. Depreciation rates of Plant & Machinery and Land & Building are 15% and 10% respectively.
Ascertain the value of share of the company under (i) Intrinsic Value Method (ii) Yield Method (iii) Fair Value Method.
(Ans.: Rs. 266, 291.85, 278.93)

Merger & Acquisition


Buy-back of share # Fortune Ltd. has issued and paid up capital of Rs. 5,00,000, the paid up value is Rs. 10 each. The present market price of the share is at Rs. 74. The company has decided to repurchase 20,00,000 shares. Calculate the repurchase price of the shares and comment upon it.

Merger & Acquisition


#

Categories of M & A:
1) Horizontal 2) Vertical 3) Conglomerate

Steps in M & A
1) Screening and Investigation of Merger Proposal 2) Negotiation Stage 3) Approval of proposal by BOD 4) Approval of the Share-holders (Amalgamation Scheme) 5) Approval of creditors / Financial Institution / Bank 6) Tribunals Approval (Dissolution without Windin-up) 7) Approval of Central Government (172A of Indian I.T Act) 8) Integration Stage (Structural and Cultural)

Merger & Acquisition


Some Preventive Measures in Take-over:
Poison Pills White Knight ,White Squire Defence and Grey Knight Greenmail Capital Restructuring Litigation Pac-men Defence Shark Repellents

Merger & Acquisition


Substantial Acquisition of Shares and Takeovers:

Merger & Acquisition


Maximum Purchase Consideration Prob: 2 A Ltd. proposes to acquire B Ltd. The vendor company B Ltd. has Rs. 10 lakh debt carrying coupon rate 10%. The B ltd. has to discharge the debt at par value before going into merger. Incremental EBIT from acquisition of B Ltd. is Rs. 5 Lakh each for 10 years. The annual depreciation is Rs. 60,000. Share capital consists of 60,000 shares of nominal value Rs. 10. The cost of unlevered equity is 15%. The current PAT is Rs. 2,00,000 and current market price per share is Rs. 30. The tax rate is 40%. Calculate TV with the help of P/E method. Compute maximum purchase consideration.

(Rs.29.15 Lakh)

Merger & Acquisition


Maximum Purchase Consideration Prob: 3 A Ltd is a manufacturer of certain product P. K ltd. owns a shop chain selling same line of products as of S Ltd. Independent cash flow estimates (in Rs. Lakh) of two companies for next 10 years as follows:
Years
S Ltd. CFs K Ltd. CFs

1
120

2
160

3
200

4
280

5
340

6
460

7
520

8
600

9
660

10 6000 800

1500 1700 2000 2500 3000 3400 3800 4500 5000

S Ltd. is interested in acquiring K Ltd. in order to get some additional retail outlets. They made the following cost-benefit calculations: a) Net assets of K Ltd. were valued at Rs. 1,000 lakh consisting of FAs of 800 lakh, Investment Rs. 200 lakh, Stock Rs. 400 lakh and Creditors Rs. 400 lakh. b) Sundry FAs amounting to Rs. 50 lakh cannot be used and their net realizable value is Rs 45 lakh.

Merger & Acquisition


c) Stock can be realized immediately at Rs. 470 lakh. d) Investments can be disposed off for Rs. 212 lakh. e) Some workers of K Ltd. are to be retrenched for which estimated compensation is Rs. 130 lakh. f) Sundry Creditors are to discharged immediately. g) A liability for retirement benefits not accounted for in the B/S by K Ltd. is Rs. 48 lakh. Expected CFs of the combined business will be as follows:
Years
CFs (Rs. in lakh)

10 6900

1800 1900 2300 2950 3500 4000 4500 5300 5800

Find out the maximum value of K Ltd. that S Ltd can quote. Also show the difference in valuation had there had been no merger. Use 20% as DF.

Merger & Acquisition


Maximum Purchase Consideration Prob: 4 C ltd. and K Ltd. have agreed that C Ltd. will take over the business of K Ltd. with effect from 31st December 2010. It is agreed that: i) 10,00,000 shareholders of K Ltd. will receive shares of C Ltd. The swap ratio is determined on the basis of 26 weeks average market price of shares of both the companies. Average prices have been worked out at Rs. 80 and Rs. 30 for the shares of C Ltd. and K Ltd. respectively. ii) In addition to (i) above, shareholders of K Ltd. will be paid cash based on the projected synergy that will arise on the absorption of the business of K by C Ltd. 50% of the projected benefits will be paid for the shareholders of K Ltd. The management of the companies has agreed upon the following projection:
Years 1 2 3 4 5
Benefit (Rs. in lakh) 50 75 90 100 105

Merger & Acquisition


It benefit is estimated to grow at the rate of 2% from 2016 onwards. It has been further agreed that a discount of 20% should be used to calculate the cash that the holder of each share of K Ltd. will receive. i) Calculate the cash that the holder of each share of K Ltd. will receive. ii) Calculate the total Purchase Consideration.
(Ans. 400 lakh, 537.5 lakh)

Merger & Acquisition


Maximum Purchase Consideration by APV approach PC = Value of Business = a) Base Case NPV + b) PV of CFs of Side Effects a) CFs = EBIT(1-T) + Non-cash Expenditure (Depn. and Amortization) b) CFs = Interest Tax-shield (I.T) Prob: 1 A Ltd. desires to acquire B Ltd. and submits the following cash flow projection from the year 1 to year 5. The fifth year cash flow is expected to grow annually by 3% for remaining life of the business. The acquisition shall be financed partly by 10% loan Rs. 10 lakh. The loan is to brought down to Rs. 5 lakh in 5-year time. The remaining loan can be taken as perpetual as far as analysis is concerned. Determine the value of B Ltd. if cost of unlevered equity is 15% and Levered equity is 20%. Assume 40% tax.

Maximum Purchase Consideration by APV approach PC = Value of Business = a) Base Case NPV + b) PV of CFs of Side Effects a) Base Case CFs = EBIT(1-t) + Non-cash Expenditure (Depn. and Amortization) b) Side Effects CFs = Interest Tax-shield (I.t) Prob: 1 A Ltd. desires to acquire B Ltd. and submits the following cash flow projection from the year 1 to year 5. The fifth year cash flow is expected to grow annually by 3% for remaining life of the business. The acquisition shall be financed partly by 10% loan Rs. 10 lakh. The loan is to brought down to Rs. 5 lakh in 5-year time. The remaining loan can be taken as perpetual as far as analysis is concerned.

Merger & Acquisition

Determine the value of B Ltd. if cost of unlevered equity is 17% and Levered equity is 15%. Assume 40% tax.

Years
EBIT(1-t) + Depn. (Rs. in lakh)

1
8

2
8

3
8

4
11

5
11

Merger & Acquisition


Merger with crss holding.
Prob: 1# Following are the summarised B/S of X Ltd and Y Ltd. as 31/12/2008.
Liabilities Sh. Cap. (Sh. Of Rs. 10 each)
X Ltd. (Rs.) Y Ltd. (Rs.)

Assets

X Ltd. (Rs.) Y Ltd. (Rs.) 4,07,500 2,30,000

2,50,000

90,000 Sundry Assets

R/S
Debentures Creditors

72,500
1,50,000 4,72,500 4,72,500

- Shares in X Ltd. (5000)


1,00,000 Shares in Y Ltd. (2250) 1,00,000 Debentures in Y 2,90,000 P & L A/C 2,90,000

15,000 50,000 4,72,500

50,000
10,000 2,90,000

The two companies agreed that X Ltd. should take over Y Ltd. the Deb. of Y Ltd. agreed to convert the Deb. into 9% Red. Preference Shares of Rs. 100 each. Prior to absorption, X Ltd. declared a dividend of 20%, the same had not yet been paid. Shareholders in y Ltd. were to receive shares in X Ltd. on the basis of the intrinsic value of shares. The sundry assets of Y Ltd. has been written up by Rs. 20,000 and those of X Ltd. reduced by Rs. 7,500. Draw up the merged B/S.

Merger & Acquisition


Evaluation of the Proposed Merger

A merger can be evaluated by comparison of per-merger values of merging entities with value of merged business proportionate to ownership of the respective shareholder groups in the combined business.

Prob.1# Share capital of A Ltd. and B Ltd. consists of 64,000


Rs. 100 shares and 20,000 Rs. 100 shares respectively. A Ltd. is planning to acquire B Ltd. by exchange of 4 shares for every 5 shares in B Ltd. The cost of equity for A Ltd., B Ltd and combined business (AB Ltd.) are 14%, 16% and 15% respectively. The expected CF related information are below for the three companies. The last of forecast CFs are expected to grow by 5% annually from year 6 in each case.

Merger & Acquisition


Year A Ltd. EBDIT DEPN INTT B. Ltd EBDIT DEPN INTT AB Ltd. EBDIT DEPN INTT 1 37 5 2 8.5 1.5 1 51 7 4 2 40.5 4.5 2 10.2 1.2 1 60 6 4 3 45.5 3.5 2 12 1 1 64.5 5.5 4 4 49 3 2 13.9 0.9 1 73 4 4 5 54 2 2 16.5 0.5 1 78 4 4

Tax rate is 40%. Evaluate the proposed merger from both the companies angle.

Merger & Acquisition

Merger & Acquisition