SFM Dawn Merger and Acquisition
SFM Dawn Merger and Acquisition
SFM Dawn Merger and Acquisition
MANAGEMENT BUYOUT
The warrants can be exercised any time after 4 years from now for 10 equity
shares @ ` 120 per share.
The loan is repayable in one go at the end of 8th year. The debentures are
repayable in equal annual installment consisting of both principal and interest
amount over a period of 6 years.
Mr. Smith is of view that the proposed dividend shall not be kept more
than 12.5% of distributable profit for the first 4 years. The forecasted EBIT
after the proposed buyout is as follows:
Year 2013-14 2014-15 2015-16 2016-17
EBIT (` crore) 48 57 68 82
Applicable tax rate is 35% and it is expected that it shall remain unchanged at
least for 5-6 years. In order to attract VenCap, Mr. Smith stated that book
Sanjay Saraf Educational Institute Pvt. Ltd. Page 1
Merger & Acquisition
Answer :
Working Notes
114. Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the
companies are dependent on the fluctuating business conditions. The
following information is given for the total value (debt + equity) structure of
each of the two companies.
Business Condition Probability Simple Ltd. Dimple Ltd.
` Lacs ` Lacs
High Growth 0.20 820 1050
Medium Growth 0.60 550 825
Slow Growth 0.20 410 590
The current debt of Dimple Ltd. is ` 65 lacs and of Simple Ltd. is ` 460 lacs.
Calculate the expected value of debt and equity separately for the merged entity.
Answer :
Since the Company has limited liability the value of equity cannot be negative
therefore the value of equity under slow growth will be taken as zero
because of insolvency risk and the value of debt is taken at 410 lacs. The
expected value of debt and equity can then be calculated as:
Simple Ltd.
` in Lacs
High Growth Medium Growth Slow Growth Expected
Value
Prob. Value Prob. Value Prob. Value
Debt 0.20 460 0.60 460 0.20 410 450
Equity 0.20 360 0.60 90 0.20 0 123
820 550 410 576
Dimple Ltd.
` in Lacs
High Growth Medium Growth Slow Growth Expected
Value
Prob. Value Prob. Value Prob. Value
Equity 0.20 985 0.60 760 0.20 525 785
Debt 0.20 65 0.60 65 0.20 65 65
1050 825 590 823
Expected Values
` in Lacs
Equity Debt
Simple Ltd. 126 Simple Ltd. 450
Dimple Ltd. 758 Dimple Ltd. 65
884 515
115. C Ltd. & D Ltd. are contemplating a merger deal in which C Ltd. will acquire
D Ltd. The relevant information about the firms are given as follows:
C Ltd. D Ltd.
Total Earnings (E) (in millions) `96 `30
Number of outstanding shares (S) 20 14
(in millions)
Earnings per share (EPS) (`) 4.8 2.143
Price earnings ratio (P/E) 8 7
Market Price per share (P) (`) 38.4 15
Answer :
CASH DEAL
116. The equity shares of XYZ Ltd. are currently being traded at ` 24 per share in the
market. XYZ Ltd. has total 10,00,000 equity shares outstanding in number; and
promoters' equity holding in the company is 40%.
PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The estimated
present value of these synergies is ` 80,00,000.
Further PQR feels that management of XYZ Ltd. has been over paid. With better
motivation, lower salaries and fewer perks for the top management, will lead to
savings of ` 4,00,000 p.a. Top management with their families are promoters of
XYZ Ltd. Present value of these savings would add ` 30,00,000 in value to the
acquisition.
Following additional information is available regarding PQR Ltd.:
Earnings per share :`4
Total number of equity shares outstanding : 15,00,000
Market price of equity share : ` 40
Required:
(i) What is the maximum price per equity share which PQR Ltd. can
offer to pay for XYZ Ltd.
(ii) What is the minimum price per equity share at which the management of
XYZ Ltd. will be willing to offer their controlling interest?
Answer :
(a) Calculation of maximum price per share at which PQR Ltd. can offer to pay
for XYZ Ltd.’s share
Market Value (10,00,000 x ` 24) ` 2,40,00,000
Synergy Gain ` 80,00,000
Saving of Overpayment ` 30,00,000
` 3,50,00,000
Maximum Price (` 3,50,00,000/10,00,000) ` 35
Alternatively, it can also be computed as follows:
Let ER be the swap ratio then,
STOCK DEAL
117. The CEO of a company thinks that shareholders always look for EPS. Therefore
he considers maximization of EPS as his company's objective. His
company's current Net Profits are ` 80.00 lakhs and P/E multiple is 10.5. He
wants to buy another firm which has current income of ` 15.75 lakhs & P/E
multiple of 10.
What is the maximum exchange ratio which the CEO should offer so that he
could keep EPS at the current level, given that the current market price of
both the acquirer and the target company are ` 42 and ` 105 respectively?
If the CEO borrows funds at 15% and buys out Target Company by paying
cash, how much should he offer to maintain his EPS? Assume tax rate of 30%.
Answer :
(i)
Acquirer Company Target Company
Net Profit ` 80 lakhs ` 15.75 lakhs
PE Multiple 10.50 10.00
Market Capitalization ` 840 lakhs ` 157.50 lakhs
Market Price ` 42 ` 105
No. of Shares 20 lakhs 1.50 lakhs
EPS `4 ` 10.50
Maximum Exchange Ratio 4 : 10.50 or 1 : 2.625
Thus, for every one share of Target Company 2.625 shares of Acquirer
Company.
118. Bank 'R' was established in 2005 and doing banking in India. The bank is facing
DO OR DIE situation. There are problems of Gross NPA (Non Performing
Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/ Capital Risk
Weight Asset Ratio) at 4%. The net worth of the bank is not good. Shares are
not traded regularly. Last week, it was traded @` 8 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other
bank.
Bank 'P' is professionally managed bank with low gross NPA of 5%.It has Net
NPA as 0% and CAR at 16%. Its share is quoted in the market @ ` 128
per share. The board of directors of bank 'P' has submitted a proposal to RBI
for take over of bank 'R' on the basis of share exchange ratio.
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Merger & Acquisition
Answer :
Balance Sheet
` lac ` lac
Paid up Share Capital 517.50 Cash in Hand & RBI 2900.00
Reserves & Surplus 5500.00 Balance with other banks 2000.00
Capital Reserve 192.50 Investment 16100.00
Deposits 44000.00 Advances 30500.00
Other Liabilities 3390.00 Other Assets 2100.00
53600.00 53600.00
(d) Calculation CAR & Gross NPA % of Bank ‘P’ after merger
Total Capital
CAR /CRWAR
Risky Weighted Assets
Bank ‘R’ Bank ‘P’ Merged
Total Capital 4% 16%
Risky Weighted Assets ` 210 lac ` 6000 lac ` 6210 lac
Deposits ` 5250 lac ` 37500 lac `42750
Other Liabilities 44000.00 Advances lac
3390.00 Other Assets 30500.00
53600.00 2100.00
53600.00
Rs. 6210 lac
CAR 14.53%
Rs.42750 lac
Gross NPA
GNPA Ratio 100
Gross Deposits
Answer :
1.
(i)
E Ltd. H Ltd.
Market capitalisation 1000 lakhs 1500 lakhs
No. of shares 20 lakhs 15 lakhs
Market Price per share ` 50 ` 100
P/E ratio 10 `5
EPS `5 ` 20
Profit ` 100 lakh ` 300 lakh
Share capital ` 200 lakh ` 150 lakh
Reserves and surplus ` 600 lakh ` 330 lakh
Total ` 800 lakh ` 480 lakh
Book Value per share ` 40 ` 32
Free float of market capitalization = ` 69.56 per share × (57.50 lakh × 40%)
= ` 1599.88 lakh
Answer :
(c)
(1) Promoter’s holding
Promoter’s Revised Abhiman 50% i.e. 1.00 Lakh shares
Holding Abhishek 60% i.e. 0.90 Lakh shares
Total 1.90 Lakh shares
Promoter’s % = 1.90/3.50 x 100 = 54.29%
121. XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for
each share of ABC Ltd. Relevant financial data are as follows:
Equity shares outstanding 10,00,000 4,00,000
EPS (`) 40 28
Market price per share (`) 250 160
(i) Illustrate the impact of merger on EPS of both the companies.
(ii) The management of ABC Ltd. has quoted a share exchange ratio of 1:1
for the merger. Assuming that P/E ratio of XYZ Ltd. will remain
unchanged after the merger, what will be the gain from merger for ABC
Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ
Ltd.
Answer :
1. Working Notes
a)
XYZ Ltd. ABC Ltd.
Equity shares outstanding (Nos.) 10,00,000 4,00,000
EPS ` 40 ` 28
Profit ` 400,00,000 ` 112,00,000
PE Ratio 6.25 5.71
Market price per share ` 250 ` 160
(iii) Gain/ loss from the Merger to the shareholders of XYZ Ltd.
Market Price of Share ` 228.56
Market Price of Share before Merger ` 250.00
Loss from the merger (per share) ` 21.44
Answer :
(i) (a) Calculation of EPS when exchange ratio is in proportion to relative EPS of
two companies
Company X 3,00,000
Company Y 2,00,000 x 2.25/4 1,12,500
Total number of shares after merger 4,12,500
Company X
EPS before merger = `4
EPS after merger = ` 16,50,000/4,12,500 shares = `4
Company Y
EPS before merger = ` 2.25
EPS after merger
= EPS of Merged Entity after merger x Share Exchange ratio on
EPS basis = ` 2.25
2.25
` 4
4
123. BA Ltd. and DA Ltd. both the companies operate in the same industry.
The Financial statements of both the companies for the current financial year are
as follows:
Balance Sheet
Particulars BA Ltd. (`) DA Ltd. (`)
Current Assets 14,00,000 10,00,00
Fixed Assets (Net) 10,00,000 0
Total (`) 24,00,000 5,00,000
Equity capital (`10 each) 10,00,000 15,00,000
Retained earnings 2,00,000 8,00,000
14% long-term debt 5,00,000 --
Current liabilities 7,00,000 3,00,00
Total (`) 24,00,000 4,00,000
15,00,000
Income Statement
Assume that both companies 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:
(i) Decompose the share price of both the companies into EPS and P/E
components; and also segregate their EPS figures into Return on Equity
(ROE) and book value/intrinsic value per share components.
(ii) Estimate future EPS growth rates for each company.
(iii) Based on expected operating synergies BA Ltd. estimates that the intrinsic
value of DA’s equity share would be `20 per share on its acquisition.
You are required to develop a range of justifiable equity share exchange
ratios that can be offered by BA Ltd. to the shareholders of DA Ltd.
Based on your analysis in part (i) and (ii), would you expect the negotiated
terms to be closer to the upper, or the lower exchange ratio limits and why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4: 1 being
offered by BA Ltd. and indicate the immediate EPS accretion or dilution, if
any, that will occur for each group of shareholders.
(v) Based on a 0.4: 1 exchange ratio and assuming that BA Ltd.’s pre-merger P/E
ratio will continue after the merger, estimate the post-merger market price.
Also show the resulting accretion or dilution in pre-merger market prices.
Answer :
Market price per share (MPS) = EPS X P/E ratio or P/E ratio = MPS/EPS
(i) Determination of EPS, P/E ratio, ROE and BVPS of BA Ltd. and DA Ltd.
BA Ltd. DA Ltd.
Earnings After Tax (EAT) ` 2,10,000 ` 99,000
No. of Shares (N) 100000 80000
EPS (EAT/N) ` 2.10 ` 1.2375
Market price per share (MPS) 40 15
P/E Ratio (MPS/EPS) 19.05 12.12
Equity Funds (EF) ` 12,00,000 ` 8,00,000
BVPS (EF/N) 12 10
ROE (EAT/EF) × 100 17.50% 12.37%
124. TK Ltd. and SK Ltd. are both in the same industry. The former is in negotiation
for acquisition of the latter. Information about the two companies as per their
latest financial statements are given below :
TK Ltd. SK Ltd.
` 10 Equity shares outstanding 24 Lakhs 12 Lakhs
Debt :
10% Debentures (` Lakhs) 1160 -
12.5% Institutional Loan ( ` Lakhs) - 480
Earnings before interest, depreciation and tax 800.00 230.00
(EBIDAT) (` Lakhs)
Market Price/Share (`) 220.00 110.00
TK Ltd. plans to offer a price for SK Ltd. business, as a whole, which will be 7
times of EBIDAT as reduced by outstanding debt and to be discharged by
own shares at market price.
SK Ltd. is planning to seek one share in TK Ltd. for every 2 shares in SK Ltd.
based on the market price. Tax rate for the two companies may be assumed as
30%.
Calculate and show the following under both alternatives - TK Ltd.'s offer
and SK Ltd.'s plan :
Sanjay Saraf Educational Institute Pvt. Ltd. Page 23
Merger & Acquisition
Answer :
(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.
Answer :
126. The following information is relating to Fortune India Ltd. having two
division, viz. Pharma Division and Fast Moving Consumer Goods Division
(FMCG Division). Paid up share capital of Fortune India Ltd. is consisting of
3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd. decided to de-
merge Pharma Division as Fortune Pharma Ltd. w.e.f. 1.4.2009. Details of
Fortune India Ltd. as on 31.3.2009 and of Fortune Pharma Ltd. as on
1.4.2009 are given below:
Particulars Fortune Pharma Fortune India Ltd.
Ltd. `
`
Outside Liabilities
Secured Loans 400 lakh 3,000 lakh
Unsecured Loans 2,400 lakh 800 lakh
Current Liabilities & Provisions 1,300 lakh 21,200 lakh
Assets
Fixed Assets 7,740 lakh 20,400 lakh
Investments 7,600 lakh 7,600 lakh
Current Assets 8,800 lakh 30,200 lakh
Loans & Advances 900 lakh 7,300 lakh
Deferred tax/Misc. Expenses 60 lakh (200) lakh
Calculate:
1. The Ratio in which shares of Fortune Pharma are to be issued to the
shareholders of Fortune India Ltd
2. Expected Market price of Fortune India (FMCG) Ltd.
3. Book Value per share of both the Companies immediately after Demerger.
Answer :