Valuation of Mergers and Acquisitions

Illustration 1 - X Ltd. is intending to acquire B Ltd. (by merger) and the following information is available
in respect of the companies.
Particulars X Ltd. B Ltd.
No. of Equity hares !"##"### $"##"###
Earnings after ta% (&s.) '!"##"### ("##"###
)ar*et value per share (&s.) '+ +,
(i) -hat is the present E. of both the companies/
(ii) 0f the proposed merger ta*es place" what would be the new earning per share for X Ltd. (assuming that the merger
ta*es place by e%change of equity shares and the e%change ratio is based on the current mar*et prices).
(iii) -hat should be e%change ratio" if B Ltd. want to ensure the same earnings to members as before the merger ta*es
place/
Illustration 2 - X Ltd. is considering the proposal to acquire 1 Ltd. and their financial information is given
below2
Particulars X Ltd. Y Ltd.
No. of Equity shares +#"##"### 3"##"###
)ar*et price per share (&s.) $# +4
)ar*et 5apitalisation (&s.) $"##"##"### +"#4"##"###
X Ltd. intend to pay &s. +",#"##"### in cash for 1 Ltd." if 1 Ltd.6s mar*et price refl ects only its value as
a separate entity. 5alculate the cost of merger 2 (i) -hen merger is fi nanced by cash (ii) -hen merger is
financed by stoc*.
Illustration 3 - East 5o. Ltd. is studying the possible acquisition of -est 5o. Ltd. by way of merger. 7he
following data are available in respect of the companies2
Particulars East Co. Ltd . West Co. Ltd.
Earnings after ta% (&s.) '"##"### 3#"###
No. of equity shares ,#"### +#"###
)ar*et value per share (&s.) +! +'
(i) 0f the merger goes through by e%change of equity share and the e%change ratio is based on the current
mar*et price" what is the new earnings per share for East 5o. Ltd./ (ii) -est 5o. Ltd. wants to be sure that
the earnings available to its shareholders will not be diminished by the merger. -hat should be the
e%change ratio in that case/
Illustration 4 - 8 Ltd. is considering ta*eover of B Ltd. and 5 Ltd. 7he fi nancial data for the three
companies are as follows 2
Particulars A Ltd. B Ltd. C ltd
.Equity hare 5apital of &s.+# each (&s. crores) ,!# +4# (#
Earnings (&s. crores) (# +4 +4
)ar*et price of each share (&s.) 3# $9 ,3
5alculate 2
(i) .rice earnings ratios
(ii) Earning per share of 8 Ltd. after the acquisition of B Ltd. and 5 Ltd. separately. -ill you
recommend/ the merger of either:both of the companies/ ;ustify your answer.
Illustration 5 - X1< Ltd. is considering merger with 8B5 Ltd. X1< Ltd.6s shares are currently traded at
&s. '!. 0t has '"##"### shares outstanding and its profits after ta%es (.87) amount to &s. &s. ,"##"###.
8B5 Ltd. has +"##"### shares outstanding= its current mar*et price is &s. +'.!# and its .87 are &s.
+"##"###. 7he merger will be effected by means of a stoc* swap (e%change). 8B5 Ltd. has agreed to a
plan under which X1< Ltd. will offer the current mar*et value of 8B5 Ltd.6s shares2
(i) -hat is the pre>merger earnings per share (E.) and .:E ratios of both the companies/
(ii) 0f 8B5 Ltd.6s .:E ratio is 4" what is its current mar*et price/ -hat is the e%change ratio/ -hat
willX1< Ltd.6s post>merger E. be/
(iii) -hat must the e%change ratio be for X1< Ltd.6s that pre and post>merger E. to be the same/
Illustration 6 2 5ompany X is contemplating the purchase of 5ompany 1" 5ompany X has $"##"###
shares having a mar*et price of &s. $# per share" while 5ompany 1 has '"##"### shares selling at &s. '#
per share. 7he E. are &s. ,.## and &s. '.'! for 5ompany X and 1 respectively. )anagements of both
companies are discussing two alternative proposals for e%change of shares as indicated below2
(i) in proportion to the relative earnings per share of two 5ompanies.
(ii) #.! share of 5ompany X for one share of company 1 (! 2 +).
1ou are required2
(i) to calculate the Earnings .er hare (E.) after merger under two alternatives= and
(ii) to show the impact on E. for the shareholders of two companies under both alternatives.
Illustration 7 2 8B5 Ltd. is run and managed by an efficient team that insists on reinvesting 3#? of its
earnings in pro@ects that provide an &AE (&eturn of Equity) of +#? despite the fact that the firm6s
capitaliBation rate (C) is +!?. 7he firm6s currently year6s earnings is &s. +# per share. 8t what price will
the stoc* of 8B5 Ltd. sell/ -hat is the present value of growth opportunities/ -hy would such a firm be
a ta*eover target/
Illustration 8 2 Dollowing are the fianancial statement for 8 Ltd. for the current financial year. Both the
frim operate in the same industry2
Balance Seet !Rs."
Particulars A Ltd. B. Ltd.
7otal 5urrent assets +,"##"### +#"##"###
7otal Di%ed assets (net) +#"##"### !"##"###
',"##"### +!"##"###
Equity capital (of &s. +# each) +#"##"### 4"##"###
&etained earnings '"##"###
+,? Long>term debt !"##"### $"##"###
7otal 5urrent liabilities 9"##"### ,"##"###
',"##"### +!"##"###
Inco#e-State#ents !Rs."
Particulars A Ltd. B. Ltd.
Net sales ,"!#"### +9"##"###
5ost of goods sold '9"3#"### +$"3#"###
Eross profit 3"(#"### $",#"###
Aperating e%penses '"##"### +"##"###
0nterest 9#"### ,'"###
Earning before ta%es ,"'#"### +"(4"###
7a%es (!#?) '"+#"### (("###
Earning after ta%es (E87) '"+#"### (("###
8dditional 0nformation
Number of equity shares +#"### 4"###
Fivident payment ratio (F:.) ,#? 3#?
)ar*et price per share ().) &s. ,## &s. +!#
8ssume that the two firms are in the process of negotiating a merger through an e%change of equity
shares. 1ou have been as*ed to assist in establishing equitable e%change terms" and are required to G
(i) Fecompose the share prices of both the companies into E. and .:E components" and also segregate
their E. figures into return on equity (&AE) and boo* value:intrinsic value per share (BH.)
components.
(ii) Estimate future E. growth rates for each firm.
(iii) Based on e%pected operating synergies" 8 Ltd. estimates that the intrinsic value of B6s equity share
would be &s. '## per share on its acquisition. 1ou are required to develop a range of @ustifiable equity
share e%change ratios that can be offered by 8 Ltd. to B Ltd. Is shareholders. Based on your analysis in
parts (i) and (ii) would you e%pect the negotiated terms to be closer to the upper" or the lower e%change
ratio limits/ -hy/
(iv) 5alculate the post>merger E. based on an e%change ratio of #.,2+ being offered by 8 Ltd. 0ndicate
the immediate E. accretion or dilution" if any" that will occur for each group of shareholders.
(v) Based on a #.,2+ e%change ratio" and assuming that 86s pre>merger .:E ratio will continue after the
merger" estimate the post>merger mar*et price. how the resulting accretion or dilution in pre>merger
mar*et prices.
-or*er price per share ().) J E. % .:E ratio or .:E &atio J ). : E.
0llustration ( 2 Dat Ltd. wants to acquire Lean Ltd. the Balance sheet of Lean Ltd. as on $+st )arch" '##(
is as follows2
Liabilities Rs. Assets Rs.
Equity share capital (3#"### hares)3##### cash '####
&etained Earnings '##### debtors $####
+'? Febentures '##### 0nvestments +9####
5reditors and other liabilities $'#### .lant "equipments ++#####
+$'#### +$'####
8dditional information2
(i) hareholders of Lean Ltd. will get one share in Dat Ltd. for every two shares. E%ternal liabilities
aree%pected to be settled aat &s. $"##"###. hares of Dat Ltd. would be issued at its current price of &s. +!
per share. Febentureholders will get +$? convertible debentures in the purchasing company for the same
amount. Febtors and inventories are e%pected to realise &s. +"4#"###.
(ii) Dat Ltd. has decided to operate the business of Lean Ltd. as a separate division. 7he division is li*ely
to give cash flows (after ta%) to the e%tent of &s. $"##"### per year for 3 years. Dat Ltd. Kas planned that"
after 3 years this division would be demerged and disposed of for &s. +"##"###.
(iii) 5ompany6s cost of capital is +,?. )a*e a report to the managing director advising him about the fi
nancial feasibility of the acquisition. Note2 .resent Halue of &e. + for si% years L +,?2 #2499'" #.93(!"
#.39!#" #.!('+" #.!+(, and #.,!!3.
0llustration +# 2 X1< Ltd. is considering merger with 8B5 Ltd.6s shares are currently traded at &s. '##. 0t
has '!"### shares outstanding and its profi t after ta%es (.87) amount to &s. !"##"###. 8B5 Ltd. has
+"'!"### shares outstanding" its current mar*et price is &s. +## and its .87 are &s. +"'!"###. 7he merger
will be effected by means of a stoc* swap (e%change). 8B5 Ltd. has agreed to a plan under which X1<
Ltd. -ill offer the current mar*et value of 8B5 Ltd.6s shares2
(i) -hat is the pre>merger earning per share (E.) and .:E ratios of both the companies/
(ii) 0f 8B5 Ltd.6s .:E ratio is 3.," what is its current mar*et price/ -hat is the e%change ratio/ -hat will
X1< Ltd.6s post>merger E. be/
(iii) -hat should be the e%change ratio" if X1< Ltd.6s pre>merger and post>merger E. are to be the
same/
0llustration ++ 2 ) Ltd. is studying the possible acquisition of N Ltd. by way of merger. 7he following
data are available in respect of the companies2
Particulars M Ltd. N Ltd.
.rofits after ta% (.87) &s. 4#"##"### . ',"##"###
No. of equity shares +3"##"### ,"##"###
)ar*et value per share &s. '## +3#
(i) 0f the merger goes through by e%change of equity and the e%change ratio is based on the current mar*et
price" what is the new earnings per share for ) Ltd./
(ii) N Ltd. wants to be sure that the earnings available to its sharesholders will not be diminished by the
merger. what should be the e%change ratio in that case/
0llustration2 +' 2 B Ltd. is intending to acquire < Ltd. by merger and the following information is available
in respect of the companies2
B Ltd. Z Ltd.
Number of equity shares +###### 3#####
Earning after ta% !###### +4#####
)ar*et value per share ,' '4
&equired 2
(i) -hat is the present E. of both the companies/
(ii) 0f the proposed merger ta*es place" what would be the new earning per share for B Ltd./ 8ssume that
the merger ta*es place by e%change of equity shares and the e%change ratio is based on the current mar*et
price.
(iii) -hat should be e%change ratio" if < Ltd. wants to ensure the earning to members are as before the
merger ta*es place/
0llustration +$ 2 7he following information is provided related to the acquiring fi rm )ar* Limited and the
target fi rm )as* Limited2
Mark Liited Mask Liited
.rofi ts after ta% (.87) '###la*hs >>>>>>>> ,##la*hs
Number of shares outstanding'##la*hs +##la*hs
.:E ratio (times) +# !
&equired2
(i) -hat is the swap ratio based on current mar*et price/
(ii) -hat is the E. of )ar* Limited after acqusition/
(iii) -hat is the e%pected mar*et price per share of )ar* Limited after acquisition" assuming .:E ratio of
)ar* Limited remains unchanged/
(iv) Fetermine the mar*et value of the merged fi rm.
(v) 5alculate gain:loss for shareholdeependent companies after acqusition.