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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
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.
24,00,000
15,00,000
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
Advertisement Suspense
2,000
2,42,400
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
Assets
Land and Building
Rs. In lakh
200 Plant and Machinery Patent and Trade Marks 40 Stock 32 Sundry Debtors 128 Bank Balance 60 Preliminary Expenses 460
Out of the total debtors, Rs. 8.00 lakhs are considered bad.
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)
(Rs.29.15 Lakh)
1
120
2
160
3
200
4
280
5
340
6
460
7
520
8
600
9
660
10 6000 800
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.
10 6900
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.
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.
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
Assets
2,50,000
R/S
Debentures Creditors
72,500
1,50,000 4,72,500 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.
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.
Tax rate is 40%. Evaluate the proposed merger from both the companies angle.