Mergers & Acquisition

Caselets
Case 1
M Co. Ltd., an established and reputed player in the software industry, is exploring avenues for strategic
expansion. In its quest to consolidate market presence and enhance technological capabilities, the
company is considering the acquisition of N Co. Ltd., a mid-sized IT firm that has carved a niche for itself
and captured a significant market share in a relatively short span of time. The acquisition is proposed to
be executed through a merger, and the management teams of both companies are currently evaluating the
financial and strategic implications of such a move.
Objective
M Co. Ltd. wants to assess the financial impact of acquiring N Co. Ltd. through an equity exchange. The
evaluation aims to determine:
1. The impact on earnings per share (EPS) if the merger is executed at a market price-based
exchange ratio.
2. The minimum exchange ratio required to ensure that N Co. Ltd.’s shareholders do not experience
a dilution in earnings post-merger.
Financial Information
The key financial data for the two companies are as follows:
Particulars M Co. Ltd. N Co. Ltd.
Earnings After Tax ₹80,00,000 ₹24,00,00
(EAT) 0
No. of Equity Shares 16,00,000 4,00,000
Market Value per Share ₹200 ₹160

Case 2

Reliable FMCG Ltd. (RFL) and Sunflower Consumer Care Ltd. (SCL) are two prominent players in the
Indian fast-moving consumer goods (FMCG) sector. While RFL has a strong national presence with
multiple product lines in personal care and home essentials, SCL has been a nimble regional brand with
deep penetration in rural markets through its affordable hygiene and food products.
In light of increasing competition from global players and rising distribution costs, RFL is exploring the
possibility of acquiring SCL through a share-based merger. Both companies believe that the merger could
potentially create value through cost optimization and expanded reach.
The financial details of the two companies before the merger are as follows:

Financial Snapshot (Pre-Merger)

Particulars Reliable FMCG Ltd. (RFL) Sunflower Consumer Care Ltd. (SCL)
Earnings After Tax (EAT) ₹20,00,000 ₹10,00,000
Number of Equity Shares 10,00,000 10,00,000
Earnings Per Share (EPS) ₹2.00 ₹1.00
Price-to-Earnings (P/E) Ratio 10 5
Market Price per Share ₹20 ₹5
 Total Market Capitalization ₹2,00,00,000 ₹50,00,000

a) What is the estimated market capitalization of Reliable FMCG Ltd. (RFL) and Sunflower
Consumer Care Ltd. (SCL) based on their current earnings and market multiples?
b) What is the minimum exchange ratio that Sunflower’s shareholders would require to maintain
their earnings value post-merger? Conversely, what is the maximum exchange ratio that Reliable
can offer without causing dilution to its own shareholders’ earnings per share?
c) What will be the total market value of the combined entity post-merger? What will be the new
EPS and market price per share? How does this transaction impact the value of RFL and SCL
shareholders individually?
d) If the merger results in operational and financial synergies, leading to a 20% increase in
combined earnings: What will be the revised earnings per share (EPS) and market price of RFL
after the merger? Under this scenario, are shareholders of both companies better off compared to
the pre-merger situation?

Case 3: Strategic Acquisition of Aan Company by Shaan Tyres Ltd.

Industry Background
The Indian tyre industry has seen growing competition in recent years, with domestic and global
players vying for market share. To consolidate operations, expand distribution networks, and
strengthen product portfolios, Shaan Tyres Ltd., a leading tyre manufacturer, is evaluating the
acquisition of a mid-sized competitor, Aan Company.
Shaan Tyres is known for its premium positioning and strong brand equity in the OEM (original
equipment manufacturer) segment, while Aan Company has built a reputation for affordability
and deep reach in tier-2 and tier-3 markets.
The management of both companies believes that this potential acquisition could lead to strategic
advantages and long-term shareholder value creation.

Financial Snapshot (Pre-Acquisition)

Particulars Shaan Company Aan Company

Total Earnings (E) ₹750 million ₹240 million
Outstanding Shares 50 million 20 million
Market Price per Share ₹250 ₹150
Earnings Per Share (EPS) ₹15.00 ₹12.00
Price-to-Earnings (P/E) 16.67 12.5
Ratio

Strategic Considerations and Key Questions

As the due diligence process progresses, the following critical questions arise:

Shareholder Protection: Maximum Exchange Ratio for Shaan Shareholders

 The management of Shaan wants to ensure that the acquisition does not dilute the earnings of its
existing shareholders. If the combined entity is expected to trade at a P/E ratio of 15 post-merger and no
synergy gains are expected:

What is the maximum exchange ratio (i.e., number of shares of Shaan offered per share of Aan)
that Shaan can offer without reducing the EPS of its own shareholders?

Fair Value to Aan Shareholders: Minimum Acceptable Exchange Ratio

From the perspective of Aan’s shareholders, they want to ensure that they do not lose value post-
merger. The management has made it clear that if they are to support the deal, the post-merger
value of their holdings must at least reflect the present value of their company.
If the merged company trades at a P/E ratio of 15 and there is an expected synergy benefit of 6%,
resulting in increased post-merger earnings:
What is the minimum exchange ratio that will ensure Aan's shareholders are not worse off after
the merger?

Case 4
PQR Ltd., a media conglomerate with a strong national presence, is considering acquiring DEF
Ltd., a well-known local media channel, through a merger. The objective is to enhance regional
outreach and consolidate market presence. The following financial data is available for the two
companies:

Particulars PQR DEF Ltd.

Ltd.
Number of Equity Shares 10,00,000 6,00,000
Earnings After Tax (Rs.) 50,00,000 18,00,000
Market Value per Share 42 28
(Rs.)

Requirements:
(i) Calculate the present Earnings Per Share (EPS) of both companies.
(ii) Assuming the merger proceeds through an exchange of equity shares based on the current
market price, calculate the new EPS for the merged entity.
(iii) Determine the exchange ratio required if DEF Ltd. wants to ensure that its shareholders
maintain the same level of earnings per share post-merger.

Case 5
Vijay Company, a leading manufacturer of electrical appliances, is evaluating the strategic
acquisition of Ajay Company, an Original Equipment Manufacturer (OEM) that has been a key
 supplier in its value chain. The acquisition is being considered to improve supply chain
integration, cost efficiencies, and long-term value creation.
The financial particulars of the two companies are as follows:

Particulars Vijay Company Ajay Company

Total Earnings (E) Rs. 200 million Rs. 100 million
Number of Outstanding 20 million 10 million
Shares
Market Price per Share Rs. 200 Rs. 120

Requirements:
1. What is the maximum exchange ratio acceptable to the shareholders of Vijay Company if the P/E
ratio of the combined entity is 18 and there is no synergy gain?
2. What is the minimum exchange ratio acceptable to the shareholders of Ajay Company if the P/E
ratio of the combined entity is 18 and there is a synergy gain of 6%?

Case 6 :

X Limited, a major player in the construction sector, is exploring strategic expansion by acquiring Y
Limited, a cement manufacturing company. The management of X Limited believes that vertical
integration through this acquisition could significantly boost its long-term cash flows and shareholder
value. To assess the feasibility of the acquisition, the management has projected the equity-related post-
tax cash flows under two scenarios — standalone (without merger) and combined (post-merger).

Financial Projections

Equity Cash Flows (Without Merger – X Limited Standalone)

Year 1 2 3 4 5

Cash Flow (Rs. 6 80 100 150 120

million) 0

 Growth beyond year 5: 8% per annum (in perpetuity)

Equity Cash Flows (With Merger – Combined Firm)

Year 1 2 3 4 5

Cash Flow (Rs. 100 12 150 250 200

million) 0

 Growth beyond year 5: 10% per annum (in perpetuity)

Additional Information

 Cost of equity capital: 15%

 Outstanding shares:
 o X Limited: 20 million

o Y Limited: 12 million

Case 7:

RAJJAN Ltd. and REKHA Corporation Ltd. are two mid-sized, independently operated firms in the
electrical manufacturing industry. Both companies have carved a niche in their respective markets and are
financially stable, operating without any debt capital.

Management at both firms is currently evaluating the potential benefits of a merger, aiming to leverage
economies of scale, particularly in distribution and advertising. These savings are expected to translate
into improved margins for the combined entity.

Financial Overview (Pre-Merger)

Particulars RAJJAN Ltd. REKHA Corp.

Revenues Rs. 8,00,000 Rs. 4,00,000
Cost of Goods Sold Rs. 6,00,000 Rs. 2,40,000
(COGS)
EBIT Rs. 2,00,000 Rs. 1,60,000
Expected Growth Rate (g) 6% 8%
Cost of Capital (Ke) 10% 12%
Tax Rate 40% 40%
 Both companies are in a steady-state: capital expenditure equals depreciation

 No working capital is required

 The firms are unleveraged (no debt)

Potential Synergy from Merger

Should the merger proceed, synergies are expected in the form of reduced operational overheads —
particularly through shared distribution and advertising infrastructure. This would reduce the Cost of
Goods Sold (COGS) from 70% of revenues to 65% for the combined firm.

Requirements:

a. Estimate the value of RAJJAN Ltd. and REKHA Corporation Ltd. before the merger.

b. Estimate the value of the combined firm assuming the synergy impact on COGS is realized.