Mergers and Acquisitions

Merger
Merger which is also known as Amalgamation. In India, refers to an activity whereby two or more
companies merge either to form a new entity or may even consider to continue under Different branch
Eg. Operational Merger [Vodafone-Idea, Maruti-Suzuki
Financial Merger [Walmart, Flipcart, Myantra – working separately one financial mergered Walmart
taken Flipcart
Types of Mergers
1. Horizontal Merger
It is a merger of companies from the same industry and at the similar stage. It is therefore also known as Merger
directly with the Competition. [Flipkart and Myntra, Vodafone and Idea, Kotak and ING]

2. Vertical Merger
It is a merger of companies of same industry, however at different stage of production and distribution.
When a company acquires its RETAILERS it is called as Forward Integration
Eg. Martuti Suzuki acquiring Nexa, Flipkart acquiring payments bank like Pay U Money
If a company acquires its SUPPLIERS, it is called as Backward Integration
Eg. Apple acquiring Powerby Proxi [Newzland based co.]
Tata Motors acquiring Tyre Manufacturing Co. Appolo Tyre
Starbucks acquiring Coffee farms in China

3. Reverse Merger
When a large co. is being acquired or taken over by a small co. it is called as Reserve Merger
It is mostly done in the case of surviving sick units
Eg. Tata Steel acquire Corus
Also when a private co. takes over a publically listed company it is called as Reserve Merger
Reasons for Demerge
(i) To pay attention on core areas of business;
(ii) The Division’s/business may not be sufficiently contributing to the revenues;
(iii) The size of the firm may be too big to handle;
(iv) The firm may be requiring cash urgently in view of other investment opportunities
Generally Cos who wish to get listed or wants to access capital markets but also wish to avoid the IPO route, may
go for the option. This process is also called the Back Dooa Listing
Eg. Chinese company buy stake in US company – Lenovo and Motorola
Regulations are mostly suspicious about Reverse mergers and also Indis Comapneis Act Disallowed the same.
Most of the reverse mergers are the cases whereby the parent co. merges with its subsidiary co.
Eg. ICICI Ltd. (Parent Co. ) merged with ICIC Bank (Subsidiary Co.) in 2002

4. Conglomerate Merger
It is a merger belonging to unrelated industries mainly done for Non-strategic benefits like Diversification or on
any other growth opportunity. Therefore, there are no strategical synergies with such mergers atleast immediately
Microsfot and Linkedin Piramal [Healthcare] and Vodafone, Sunpharma and Suzlon

5. Congeneric Merger
These are markets, Product or Technology extension merger. It is an outward movement of business from its
current business to other business.
It is a merger in almost similar industry but with different production line
Eg. Facebook acquired whatsapp and Instagram
Dell acquiring EMC
Citigroup acquiring Travellers Insurance
Process in Merger and Acquisition
Step 1 Develop an acquisition strategy
What they expect to gain from making the acquisition.
Step 2 Set the M&A search criteria
Key criteria like profit margins, geographic location or customer base
ICICI Bank acquires Sangli Bank, rural expansion
Step 3 Search for potential acquisition targets
Search for and then evaluation potential target companies
Step 4 Begin acquisition planning
Contact with one or more companies that meet its search criterial
Step 5 Perform valuation analysis
As the target company to provide substantial information like current financials, etc.)
Step 6 Negotiations
Step 7 M&A Due diligence
conducting a detailed examination and analysis of every aspect of the target company’s operations.
Step 8 Purchase and sale contracts
the parties shall make a final decision on the type of purchase agreement, whether it is to be an asset purchase or
share purchase.
Step 9 Financial strategy for the acquisition
acquirer explores financing options for the deal earlier
Step 10 Closing and integration of the acquisition
Management teams of the target and acquirer work together on the process of merging the two firms.
 Motives for mergers and acquisitions

• Economies of target scale business

• Adoption of modern technology
• Desire to enjoy monopoly power
• Elimination of competition
• Lack of technical and managerial talent
 Advantages for mergers and acquisitions
• Greater value generation
• Gaining cost effeminacy
• Increase in market share [Vodafone and idea]
• Gain higher competitiveness

Disadvantages for mergers and acquisitions

• Integration difficulties
• Large or extraordinary debt
• Managers overly focused on acquisition
• Overly diversified
 Methods for Valuation of Mergers and Acquisition
Valuation Approach

1. Asset Based Approach 1. Income Based Approach 1. Market Based Approach

2. Book Value (more realistic) Arm Length Price (related parties)
3. Liquidation 2. Capitalization of Earnings 2. Comparable Co. market multiple
4. Replacement Value 3.Discounting Cash Flow Funds 3. Comparable transaction multiple
(DCFF) 4. M.V. in case of quoted securities
 Top Five mergers and acquisition deals
Tata Steel – Corus
Vodfone – Htchison Essa [Hutch is not Vodafone]
Hindalco – Novelis [Adity Birla Group Co.]
Ranbaxy-Dahchi Sankyo [Japanese Co.]
ONGC-Imperial Energy
Mode of Consideration : (1) Cash (2) Shares
Exchange Ratio / Swap Ratio
It is a ratio at which acquirer company issues shares of its own company for acquiring the shares of target company
This Ratio is based on major financial factors of both the companies like EPS, MPS and Book Value)
OR The ratio at which an acquiring co. will offer its own shares in exchange for the targe company during M&A.

Swap Ratio = Target Co. (Acquired Co.)

Acquiring Co. (Acquirer Co.)
Basis of Swap Ratio
Earning Per Share (EPS) Market Per Share (MPS) Book Value (BV)

EPS = Earnings After Tax MPS = Market Capitalization x No. of Shares BV = Shareholder’s Funds
No. of Eq. Shs OR No. of Eq. Sh.
MPS = P/E*EPS
Shareholder’s Funds / Net Worth
NetWorth = Eq.Share Co. + P.S.C. + R+ S (-) Accumulated losses / Preliminary Exps. / P/L Dr. Balance

Price-Earing Ratio (P/E Ratio) = MPS

EPS
Interpretation : For earning one rupee how much price is ready to pay by investors, calculated in no. of times
Note – In absence of information, calculate Swap Ratio on MPS
 Problem
A Ltd. acquired B Ltd. The following information is available
Co. EPS MPS BV
A 21.5 87 20
B 38.7 83 40
Calculate Swap Ratio, if it based on EPS, MPS and B.V.

Problem
MK Ltd. is considering acquiring NN Ltd. The following information is available:
CO. EAT (RS.) No. of Eq.Sh. MV /Sh (Rs.)
MK Ltd. 60,00,000 12,00,000 200
NN Ltd. 18,00,000 3,00,000 160

Exchange of equity shares for acquisition is based on current market value as above. There
is no synergy advantage available.
(i) Find the earning per share for company MK Ltd. after merger, and
(ii) Find the exchange ratio so that shareholders of NN Ltd. would not be at a loss
Problem
A Ltd. Is considering the acquisition of B Ltd. The financial data at the time of acquisition is as follows –

CO. A Ltd. B Ltd.

Net Profit After Tax 20 Lacs 5 Lacs
No. of Shares 5 Lacs 2 Lacs
P/E Ratio (Times) 16 12

Assuming that the aggregate net profit after tax of the two companies would remain the same after
amalgamation, explain the effect of EPS of the merged company under the following situations –
a) A Ltd. Offers to pay Rs. 35 per share to the shareholders of B Ltd.
b) A Ltd. Offers to pay Rs. 45 per share to the shareholders of B Ltd.

The amount in both cases is to be paid in the form of shares of A Ltd.

Provide your comments
Problem
Co. X is contemplating the purchase of Co. Y. Co. X has 3,00,000 shares having the market value of Rs. 30 per share, while
Co. Y has 2,00,000 shares selling at Rs. 20 per share The EPS are Rs. 4 and 2.25 for Co. X and Y respectively. Management
of both the companies are discussing two alternative proposals of exchange of shares as indicated below –
1) In proportion to the relative earning per share of two companies
2) 0.5 share of Co. X for one share of Co. Y (0.5:1)
You are required to
a) Calculate the EPS after merger under two alternatives
b) To show the impact of EPS for the shareholders of two companies under both the alternatives
Problem
ABC Co. is taking over capital XYZ Co. The shareholders of XYZ would receive 0.8
shares of ABC Co. for each shares held by them. The merger is not expected to
yield in economies of scale and operating synergy. The relevant data for the two
companies are as follows –
ABC Co. XYZ Co.
Net Sales 335 118
PAT 58 12
No. of Shares 12 3
EPS 4.83 4
MPS 30 20

For the combines company (after merger). You are required to calculate
a) EPS b) P/E Ratio c) MPS d) No. of shares and e) Total market capitalization.
Also calculate the premium paid by ABC co. to the shareholders of XYZ co.
Problem
The summarized balance sheet of R Ltd. As on 31-3-2022 is given below –

Rs. In Lacs
Liabilities Amt Assets Amt
E.S. Rs. 10 each 20Fixed Assets 19
13% Pref. Shares 1Investments 1
Reserves 4Inventories 5
12% Debentures 3Debtors 4
Current Liabilities 2Bank 1
20 20

Negotiations for take over of R Ltd. result in acquisition by A Ltd.

The purchase consideration consists of
a) Rs. 3,30,000 13% Debentures of A Ltd. for redemption of 12% Debentures of R Ltd.
b) Rs. 1,00,000 12% Preference shares in A Ltd. For preference shareholders of R Ltd.
c) Rs. 1,50,000 equity shares of A Ltd. To be issued at current market price of Rs. 15
d) A Ltd. Would pay dissolution expenses Rs. 30,000
e) Eventual disposition by A Ltd. of unrequired assets and liabilities of R Ltd.
Investments Rs. 1,25,000, Debtors Rs. 3,50,000, Inventories Rs. 4,25,000, Payment of Current
Liabilities Rs. 1,90,000
f) Project is expected to generate yearly operating CFAT (cash flow after tax) of Rs.7,00,000 for 6 years. It
is estimated that fixed assets of R Ltd. Would fetch Rs.3,00,000 at the end of sixth year.
Comment on financial prudence of merger decision of A Ltd.
PV at 15%
1 – 0.870 2 – 0.756 3 – 0.658 4 – 0.572 5 - 0.496 6– 0.432
Problem
RIL is considering a take over of SIL. The particulars of two companies are given below –
in Lacs
Particulars RIL SIL
EAT 20 10
No. of sh. 10 10
EPS 2 1
PE Ratio (Times) 10 5

Required –
a) What is market value of each company before merger ?
b) Assume that management of RIL estimates that the shareholders of SIL will accept an offer of one share of RIL for
four shares of SIL. If there are no synergic effects, what is the market value of the post merger RIL ? What is the
new price per share ? Are the shareholders of RIL better off
or worse off than they were before the merger ?
c) Due to synergic effects, the management of RIL estimates that the earnings will increase by 20%, What is the new
post merger EPS and Price per share ? Will the shareholders be better off or worse off than before the merger
Problem
The following information is provided relating to the acquiring company Efficient Ltd. and
the target Company Healthy Ltd.
Efficient Ltd. Healthy Ltd.
No. of shares (F.V. Rs. 10 each) 10 lakhs 7.5 lakhs
Market capitalization 500 lakhs 750 lakhs
P/E ratio (times) 10 5
Reserves and Surplus 300 lakhs 165 lakhs
Promoter’s Holding (No. of shares) 4.75 lakhs 5 lakhs

Board of Directors of both the Companies have decided to give a fair deal to the
shareholders and accordingly for swap ratio the weights are decided as 40%, 25% and 35%
respectively for Earning, Book Value and Market Price of share of each company:

(i) Calculate the swap ratio and also calculate Promoter’s holding % after acquisition.
(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?
(iii) What is the expected market price per share and market capitalization of Efficient
Ltd. after acquisition, assuming P/E ratio of Firm Efficient Ltd. remains unchanged.
(iv) Calculate free float market capitalization of the merged firm
Problem
B co. is being acquired by A Co. on a share exchange basis. Their selected data are as follows
Rs. In Lacs
A Co. B Co.
Profit after tax 56 21
No. of Shares (in Lacs) 10 8.4
P/E Ratio (times) 12.5 7.5

Determine
a) pre-merge EPS
b) Market Value per share
c) Maximum exchange ratio A co. should offer without the dilution [reduction] of (i) EPS (ii) Market
value per share
Range of Valuation
Minimum - Always MPS
No co. is ready to sell their business below MPS so minimum is always MPS
And maximum depend on information in problem

Problem
ABC co. is considering acquisition of XYZ Ltd. This has 1.5 crores shares outstanding and issued. The
market price per share is Rs. 400 at present. ABC’s average cost of capital is 12%. Available information
from XYZ indicates its expected cash accruals for the years is as follows
Year Rs. In crores
1 250
2 300
3 400

Calculate the range of valuation that ABC has to consider (PV factor 12% for years 1 to 3 respectively
1 - 0.893 2 - 0.797 3. 0.712
Solution
XYZ Target Co. ABC Acquirer Co.
Minimum Range
MP per share x no. of shares = 400 * 1.5 = 600 crores
Maximum Range
250 *0.893 = 223.25
300*0.797 = 239.10
400*0.712 = 284.8
747.15
Maximum Range = 747.15/1.5 = 498.10
Minimum Rs. 400
Maximum Rs. 498.10