Valuation in Mergers and Acquisitions

Chapter 9
Valuation in Mergers
and Acquisitions

1. INTRODUCTION

Companies often ‘restructure’ their business in their quest for efficiency and competitiveness.
To achieve their ambitious business goals, organisations may restructure the business
organically (Internal) or inorganically (External). Organic activities include aggressive
marketing, geographical expansion, and new product development. Inorganic Restructuring
may be done in the form of Mergers and Acquisitions.
They are often considered to be faster means of achieving the desired goals.
MERGERS
Mergers (also known as Amalgamation) two or more companies (amalgamating or transferor
companies) choose to merge into a single company (amalgamated or transferee company).
In a merger, the company being bought is absorbed into the other, so it ceases to exist as a
separate entity once the merger is complete.
• Horizontal merger: When merger is between two companies that are into the same
products or services, it is called a horizontal merger. For example, in 2017, Vodafone India
and Idea Cellular merged to form Vodafone Idea (Vi). It was a horizontal merger amongst
the two biggest players in the telecom industry. This merger deal was worth USD 23 billion.
• Vertical merger: In a vertical merger, the companies are in different points in the value
chain. For example, in 2006, Walt Disney acquired Pixar Animation Studios for USD 7.4
billion. Pixar was an innovative animation studio and had talented people. Walt Disney
was a mass media and entertainment company. By ‘acquiring’ Pixar, Walt Disney got access
to high quality content which is essential for any mass-media company. A vertical merger
may be done between a supplier and customer.
• Forward integration: If the acquirer moves up the value chain towards the ultimate
consumer it is called Forward Integration (e.g., an ice cream manufacturer acquires
restaurants where it can serve ice cream).
• Backward integration: If the acquirer moves down the value chain towards raw materials
(e.g., of the ice cream manufacturer acquires a dairy farm to have better access to milk).
• Conglomerate merger: A conglomerate or diagonal merger is one where the merging
companies are neither into the same products or services, nor in the same business. It may
be part of the diversification strategy of the company.

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ACQUISITION
When both the acquiring and acquired companies still exist as separate entities at the end
of the transaction. The company making the purchase is known as the acquiring company or
acquirer. The company that is bought is known as the target company or target. Some of the
examples of acquisitions:
• In 2018, Walmart acquired 77 percent stake in Flipkart India for USD 16 billion.
• In 2013 Facebook acquired WhatsApp for USD 19 billion.
• In 2008, Tata Motors acquired the Jaguar Land Rover businesses from Ford Motor Company
for a net consideration of USD 2.3 billion, in an all-cash transaction.
• Think & Learn Pvt Ltd (Byju’s) acquired several companies such as Aakash Educational
Services Ltd (Aakash Institute), Great Learning, Epic, Tynker, Scholr, Toppr, Gradeup,
Hashlearn, Whodat, GeoGebra, WhitehatJr among others in 2021 alone in its pursuit to
grow exponentially in EdTech space.
The company which is being acquired is known as the Target or Acquired company and the
company that buys the other company is known as the Acquirer.
MOTIVES FOR MERGERS AND ACQUISITIONS
There are various motives for external restructuring.
• Growth: An ambitious company may be able to grow faster with mergers and acquisitions
than with its own internal capabilities. Usually, external growth makes more sense if the
target possesses the competencies and resources necessary to capitalize on emerging
opportunities.
• Creation of synergy: Synergies are realized when the value of the combined entity that
is formed because of the merger exceeds the value of the simple sum of its parts. These
synergies can be in the form of Cost Synergies or Revenue Synergies. The synergy can also
be expressed as the present value of any performance improvements to be achieved after
the acquisition, which will show up as improved cash flows for the target’s business or the
acquirer’s business.
• Increasing market power: By acquiring a competitor, a company can increase its pricing
power in an industry that has a small number of firms. Vertical integration may give
the acquirer greater market power if it allows the acquirer to gain control over a critical
production input by merging with a dominant supplier.
• Acquiring unique capabilities and resources: Mergers or acquisitions may also be
undertaken as an alternative to developing capabilities internally such as R&D capabilities,
effective marketing, and talent.
• Diversification: Companies may engage in mergers and acquisitions activity to diversify
their businesses.

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2. ACQUISITION PRICING

In case or Mergers or Acquisitions, the acquirer needs to pay an amount to acquire the target.
The shareholders of the target company get the compensation for dispensing with their shares
in the target against cash or shares of Acquirer. The acquisition price is the price that is paid
by the acquiring company for each of the target company’s shares. The acquirer may offer a
price which may or may not be accepted by the shareholders of the target. The final price is
usually based upon negotiations between the acquiring company and the target company
shareholders.
The acquirer can pay for the merger with cash, securities, or some combination of the two. In a
cash offering, the cash might come from the acquiring company’s existing assets or from a debt
issue. In the most general case of a securities offering, the target shareholders receive shares of
the acquirer’s shares as compensation. In a stock offering, the exchange ratio determines the
number of shares that shareholders in the target company receive in exchange for each of their
shares in the target company. Each shareholder of the target company receives new shares
based on the number of Target’s shares he or she owns multiplied by the exchange ratio.
In a hostile acquisition, the target company’s management does not want to be acquired. The
acquirer offers a price higher than the target company’s market price prior to the acquisition
and invites shareholders in the target firm to tender their shares for the price. The difference
between the acquisition price and the market price prior to the acquisition is called the
acquisition premium. From an accounting perspective, this acquisition premium is treated as
Goodwill in the books of the acquirer. That the price that is paid over and above the fair value of
the target company being acquired. From a Corporate Finance perspective, the acquirer must
justify this premium through synergies that they will get after the acquisition.
VALUE CREATION
Acquisitions create value when the cash flows of the combined companies are greater than
the sum of their individual values. If the acquirer doesn’t pay too much for the acquisition,
some of that value will accrue to the acquirer’s shareholders. The value created for an acquirer’s
shareholders equals the difference between the value received by the acquirer and the price
paid (Purchase Consideration) by the acquirer:

Value Created for Acquirer = Value Received Less Price paid for acquisition
Value Created for Acquirer = (Standalone Value of Target Less (Market Value of Target +
+ Value of Performance Acquisition Premium)
Improvements)

Intrinsic value Market value Purchase Value Synergy Value

Value Gap (value to target (value to acquirer
shareholders) shareholders)

Value Gap & Synergy Value

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In today’s market, the purchase price of an acquisition will nearly always be higher than the
intrinsic value of the target company. An acquirer needs to be sure that there are enough cost
savings and revenue generators - synergy value - to justify the premium so that the target
company’s shareholders don’t get all the value that the deal creates.
Intrinsic Value: the most basic value of the company its intrinsic value is based principally on
the net present value of expected future cash flows completely independent of any acquisition.
This assumes the company continues under current management with whatever revenue
growth and performance improvements have already been anticipated by the market.
Market value: On top of the intrinsic value the market may add a premium to reflect the
likelihood that an offer of the company will be made. Alternatively, a higher offer may be
tendered than one currently on the table. Market value commonly called current market
capitalization is the same as the share price. It reflects the market participants is valuation of
the company.
Purchase price: This is considered as the anticipated take out value. It’s the price that a bidder
anticipates having to pay to be accepted by the target shareholders.
Synergy value: The net present value of the cashflows that will result from improvements made
when the companies are combined. These are improvements made when the companies are
combined. These are improvements above and beyond those the market already anticipates
each company would make if the acquisition didn’t occur, since those are already incorporated
into the intrinsic value of each company.
Value gap: The difference between intrinsic value and the purchase price

2.1 Analysing Premium offered to Target Stockholders

A “purchase premium” in the context of mergers and acquisitions refers to the excess that an
acquirer pays over the market trading value of the target company’s shares being acquired.
“Premiums Paid Analysis” is the name of a common investment banking analysis that reviews
comparable transactions and averages the premiums paid for those transactions. Looking
at historical premiums when negotiating the acquisition of a public company is a key part of
framing the purchase price range. Additionally, the target company’s management analyses
historical premiums paid on comparable transactions to demonstrate to their shareholders
that they have done their duty of maximizing value to shareholders.
Premiums tend to be higher in strategic deals (one company acquiring another company)
as opposed to financial deals (a private equity firm acquiring a company). That’s because
a strategic acquirer often gains cost savings (synergies) from the newly combined company
that increases how much it can afford to pay. Example, When Microsoft acquired LinkedIn on
June 13, 2016, it paid USD 196 per share, representing a 49.5% premium over LinkedIn’s closing
share price of USD 131.08 per share the day prior to the deal announcement.

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ESTIMATING ACQUISITION PREMIUM

The acquisition premium represents the amount (per share) above the current market price
that shareholders would accept to approve the merger transaction (give up ownership of the
target to the acquirer). The takeover premium is usually expressed as a percentage of the stock
price and is calculated as:
Target Shareholders’ Gain = Deal price – Premerger Market Price of Target
(Deal price − Premerger price of Target)
Acquisition Premium (%) =
Premerger price of target

Acquisition premiums paid in recent acquisitions of similar companies (as the target) are used
to estimate the acquisition premium.

2.2 Analysing Value of the Target to the Acquirer

The reason that any acquirer would be willing to pay a takeover price more than the target’s
market value is because it believes that the benefits (e.g., improved sales or reduced costs)
it would derive from the merger exceed the premium paid for the target. All other factors
remaining the same, synergies increase the acquirer’s gain from the merger, while the takeover
premium paid to target shareholders offsets any gains to the acquirer.
Acquirer’s gain = Synergies – Premium
= S - ( P T – VT)
S = Synergies created by the transaction
PT = Price paid for the target or the Deal price
VT = Pre-merger value of the target or the Pre-merger price of target
When evaluating a merger offer, the minimum bid that target shareholders would accept is the
pre-merger market value of the target company, while the maximum amount that any acquirer
would be willing to pay is the pre-merger value of the target plus the value of potential
synergies. Thus, the bidding prices normally lie between these two amounts. This also implies
that analysis of a merger not only depends on the assessment of pre-merger target value, but
also assessments of estimated synergies.

Value of Acquirer (pre-merger)

Add: Value of Target (pre-merger)
Add: Synergy created by the merger
Less: Cash paid to target shareholders
Value of Combined Entity (post-merger)

Acquirers usually prefer to include stock in the consideration paid to target shareholders
because it effects the distribution of the risk and rewards of a merger between the acquirer and

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the target. The choice of payment method depends on estimated synergies and relative value
of the acquirer’s shares.
If the acquirer is confident about its estimates of the target’s value, the more it would prefer to
pay in cash and the more the target would prefer to receive stock. Based on various empirical
studies, in the short term, merger transactions generally benefit target company shareholders.
Since the acquirer’s almost always tend to give a premium to the target and there is a dilution
in the acquirer’s existing shareholding due to issue of shares or pay-out of cash, acquirers’ share
price tends to go down on the announcement of a merger or an acquisition. Further, both the
acquirer and the target tend to see higher stock returns under a cash acquisition as opposed to
a stock acquisition.
ACCRETION / DILUTION ANALYSIS
Accretion (Dilution) analysis measures the effects of a transaction on a potential acquirer’s
earnings assuming a given financing structure. As part of this analysis, we compare the
acquirer’s post-merger earnings per share (EPS) for the transaction with its pre-merger EPS on a
stand-alone basis. If the combined EPS is lower than the acquirer standalone EPS the transaction
is set to be dilutive, conversely if the EPS is higher, the transaction is said to be accretive. A
Rule of thumb for 100% stock transactions is that when an acquirer purchases a target with a
lower P/E , the acquisition is accretive. When a company pays a lower multiple for the target’s
earnings than the multiple at which its own earnings trade the transaction is de-facto accretive
conversely transactions where an acquired purchases higher P/E target are dilutive. Acquirers
usually target accretive transactions as they create value for their shareholders.

2.3 Earnings Multiples

The multiples based valuation is an application of the market approach of valuation. The
market approach is based on the principle of substitution which states that “one will pay no
more for an item than the cost of acquiring an equally desirable substitute.” Thus, with the
market approach value is determined based on prices that have been paid for similar items in
the relevant marketplace. Expert judgement is needed for interpretation of what companies
are similar and what markets are relevant. The market approach relevant to valuation for
mergers and acquisitions includes two primary methods, (a) the M&A transaction and (b) the
guideline public company. They result from different kinds of transactions and yield different
types of value.
Transaction multiples method
The transaction method looks at the prices paid typically by public companies to acquire
a controlling interest in a business. The buyers in these transactions are publicly traded
companies because closely held businesses usually do not reveal financial information when
they make acquisitions. These transactions are often strategic where the buyer is usually
acquiring a company in the same or similar industry in which it currently operates to achieve
various synergies or other integrative benefits. Thus, the price paid most reflects investment
value to that specific buyer rather than fair value which assumes a financial buyer.

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Guideline publicly traded multiples

It should be clearly understood that the transaction multiples are very different from the
market multiples that are available from the stock markets stop the stock market multiples
represents the volume from minority shareholders perspective. Whereas the transaction
multiples represent transactions from controlling perspective.
Price – Earnings Multiple
The valuation here is based on the following relationship:
Price per share = EPS × P/E Ratio
Earnings per Share (EPS) is projected for the company being valued.
In the case of unlisted companies, Price to Earnings Ratio (P/E Ratio) of the peer group is
considered. Peer group would be other listed companies from the same sector of a similar size.
Where more than one such company exists in the peer group, then a weighted average is
used. Suitable adjustments are made to the ratio to reflect specific areas where the company is
different from the peer group.
Example 1: If the company’s EPS is projected to be ₹ 6, and peer group P/E Ratio is 12 times,
then the shares of the company will be valued at ₹ 6 × 12 i.e. ₹ 72 per share.
If the company has issued 10 Million shares, then the valuation of the company would be ₹72 ×
10 Million i.e., ₹720 Million.
EV-EBIDTA Multiple
Earnings are affected by factors such as:
• Financing mix of debt and equity
• Accounting policies regarding depreciation and amortisation
• Tax planning
These factors are not so closely linked to the actual operations of the company. An alternate
approach to valuation uses Earnings before Interest, Depreciation, Tax and Amortisation
(EBIDTA). It is based on the following relationship:
Value of the company = EBIDTA × EV-EBIDTA Multiple
EBIDTA is projected for the company being valued. As with P/E Ratio, EBIDTA multiple for the
peer group can be used, when the company is not listed.
Example 2: if the company’s EBIDTA is projected at ₹50 Million, and the peer group EBIDTA
multiple is 20 times, then the company will be valued at ₹50 Million × 20 i.e. ₹1,000 Million.
Enterprise Value
This is calculated as the market value of equity and debt of the company, less cash/ bank and
the value of investments in the company’s portfolio.

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If a company’s shares are valued at ₹50 per share, and it has issued 10 Million shares, then the
market value of the company’s shares (also referred to as ‘market capitalisation’) would be ₹50
× 10 Million i.e. ₹500 Million.
Example 3: the market value of the debt that the company has taken is ₹10 Million, and the
company has an investment portfolio worth ₹ 5 Million. The company also has ₹ 2 Million in the
form of cash.
Enterprise Value can be calculated as ₹500 + ₹10 – ₹5 – ₹2 i.e., ₹503 mn.
Price to Book Value
The valuation is based on the following relationship:
Price per share = Book Value per share × Price to Book Value Ratio
The book value per share of the company is considered. Price to Book Value Ratio of the peer
group is used for unlisted companies.
Example 4: If the book value per share of the company is ₹ 22, and Price to Book Value ratio of
the peer group is 1.5, then each share of the company is valued at ₹ 22 × 1.5 i.e., ₹ 33.
Price to Sales Multiple
This method links valuation to the sales turnover of the company. The relationship used is as
follows:
Value = Sales Turnover × Price / Sales Multiple
Example 5: the sales turnover of a company is ₹ 150 million. The peer group sales turnover
is ₹ 600 million, and peer group market capitalisation is ₹ 1,800 million. The peer group sales
multiple is thus ₹1,800 million / ₹600 million i.e., 3 times
Accordingly, the company will be valued at ₹ 150 million × 3 i.e., ₹ 450 million.
Choosing the right comparable companies
To use earnings multiples properly, we must assess the accounting statements to make sure we
are comparing companies on an apples-to-apples basis.

2.4 Discounted Abnormal Earnings or Cash Flows

Valuers must check for operating and normal financial statements while performing financial
due diligence and normalise the financial statements before arriving at the valuation. These
adjustments are required for both the Target and Acquiring company in case of Stock based
mergers and acquisition. Adjustments to a target’s financial statements, commonly referred to
as normalization adjustments convert the reported accounting information to amounts that
show the true economic performance, financial position and cash flow after company.
Differences between amounts shown on the financial statement and the market values most
commonly result from one or more of these causes

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• Non-operating income and expenses that are non recuring in nature and may not flow
through in future periods. Thus, these should be removed from the Profit & Loss Statement
while evaluating value.
• Discretionary expenses to minimise taxes including excess compensation, perquisites,
rent or above market payments made to owners or other related parties.
• Adjustment required to change the basis of accounting, including conversion from cash to
accrual or from one inventory or depreciation method to another.
• Differences between the market value of assets and the amounts at which they are carried
on the companies books.
For smaller companies these normalization adjustments may have a greater impact than for
midsize or larger companies. Adjustments can be made to both the profit and loss statement
and the balance sheet or one can be adjusted without a corresponding change to the other. For
example, nonrecurring gain or loss can be removed from the Profit & Loss Statement without
any required adjustment to the balance sheet.
Valuers should assess whether the controlling shareholders of the target company have made
discretionary adjustments that might impact the controlling shareholders more. These may
include the compensation paid to the promoters, properties of the promoters rented by the
firm loans taken from or given to the related parties at rates of interest which are not in line
with the market rate of interest.
In case of the balance sheet, the most important adjustments are the ones which require
changing the book value of the assets to their market values. Often the contingent liabilities
may not be recorded in the balance sheet whereas there may be reasonable possibility of
those accruing to the firm. In such cases, the contingent liabilities must also be identified into
the balance sheet as liabilities. It is common for companies to not record internally generated
intangible such as brand value in the balance sheet. The acquirer must recognise the brand
value of the acquired intangibles while preparing the financial statements of the target
company.
VALUING THE ASSETS
When the financial statements are prepared using the historical cost accounting a few notes
may be relevant.
Tangible assets: It is always wise to have lands and buildings revalued. Items such as plant
and machinery, motor vehicles furniture and fixtures that are shown at their book values rather
than current cost may require to be revalued. Depreciation rates employed during the period
of review must also be reviewed to ensure that the PP&E produce either a value in use for
operating assets or the value in exchange if the assets are surplus to the requirements.
Investments: Listed shares and securities should be valued at their market price for the year
but unlisted shares must be subject of a secondary valuation using methods similar to those in
the main valuation. It is also important to distinguish between investments that are necessary
for earnings capacity of the business such as trade investments and investment in subsidiaries,
which are long term holdings and those investments that are really spare cash items.

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Current assets: If inventory and debtor turnover ratios are rapid there balance sheet values
may be taken without extensive revision. However some adjustment to current cost may
become apparent when the trading results are reviewed, relating to historical cost methods of
stock valuation and provision for bad debts.
Intangible assets: Intangible assets me or may not be recognised in the financial statements.
As per accounting regulations internally generated intangible such as brands and trademarks
may not be recognised in the financial statements of the target company. However accounting
regulations do allow the acquirer to recognise the identifiable intangible assets while preparing
the combined financial statements after the acquisition. These intangible assets certainly form
the part of the negotiation while fixing the acquisition price for the target. Usually valuers
are appointed to identify the intangible assets which may not be recorded in the financial
statements of the target company or even to re-evaluate the value of the intangibles that are
already recorded in the financial statements.

2.5 Acquisitions by Private Equity and Venture Capitalists

Acquisitions are often classified into two types.

(a) Strategic Acquisitions and
(b) Financial Acquisitions.
Strategic acquisitions are those where an acquirer intends to run the company themselves.
There are significant changes in the way the company operates. The acquirer aims at deriving
operational synergies through management integration, product changes, operational
changes and more. The target company sees this as an interference in their operations.
Financial Acquisitions are often done by Private Equities, Venture Capitalists and portfolio
companies who acquirer a company purely for their value and normally do not make
significant operational changes. Target companies who have high potential but are short of
funds normally welcome such acquisitions.
The best private-equity firms don’t just recapitalize companies with debt; they improve the
companies’ performance through improved governance. A McKinsey study of 60 successful
investments by 11 leading private-equity firms found that in almost two-thirds of the
transactions, the primary source of new value was improvement in the operating performance
of the company, relative to peers, through fruitful interaction between the owners and the
management team. The use of financial leverage and clever timing of investments, often cited
as private-equity firms’ most important sources of success, were not as important as improved
governance. Private-equity firms don’t have the time or skills to run their portfolio companies
from day to day, but the higher-performing private-equity firms do govern these companies
very differently from the way exchange-listed companies are governed. This is a key source
of their outperformance. Typically, the private-equity firms introduce a stronger performance
culture and make quick management changes when necessary. They encourage managers to
abandon any sacred cows, and they give managers leeway to focus on a longer horizon, say
five years, rather than the typical one-year horizon for a listed company. Private-equity firms
spend most of their time on strategy and performance management, rather than compliance
and risk avoidance.

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3. ACQUISITION OUTCOME

IMPACT ON SHARE PRICE

The shareholders of a company benefit from a deal if (and only if ) the value of their shares
increases. The increase may occur immediately, or it may be delayed. Normally the immediate
response to the announcement of a merger or acquisition is usually a downward blip in the
buyer’s stock price but if the deal creates value then as its success is revealed the buyers stock
price will appreciate at rate higher than its expected rate of return (the market’s risk adjusted
for the stock’s beta). These cumulative abnormal returns or CAR will continue until the stock
reaches a new equilibrium that reflects the value created by the deal. Thereafter, the stock
will appreciate at its normal common risk adjusted rate of return subject to noise and new
information.
FRIENDLY MERGERS
Generally, the acquirer approaches the target’s management directly unless it has reason to
believe that the target will not welcome the merger. If both companies are open to the idea,
the companies enter into merger discussions. Key discussion points at this stage include the
amount of consideration that target shareholders will receive, terms of the transaction, and
post-merger management structure.
Prior to reaching a formal agreement, both parties conduct due diligence (financial due
diligence, legal due diligence, etc.) where accounts and other financial records are examined
to ensure the accuracy of representations made by either party during negotiations (e.g., the
acquirer might want to confirm that the target’s assets are actually worth the amount claimed
by the target). Any issues that arise at this stage may have a direct bearing on the price and/or
terms of the deal. The target may also conduct due diligence on the acquirer to ensure financial
soundness and ability to meet merger payment terms.
Upon completion of due diligence and negotiations, the parties sign a definitive merger
agreement, which is a contract that contains terms and conditions, warranties or
representations, covenants, termination procedures and remedies, and other miscellaneous
clauses.
Typically, merger discussions and negotiations are kept confidential until the definitive
merger agreement has been signed. Once it has been signed, the transaction is announced
to the public through a joint press release by both companies. Usually, shareholders’ approval
is required (for target shareholders to approve a stock transaction, or acquirer shareholders
to approve the issuance of a substantial amount of shares to finance a stock offering)
shareholders are provided with a proxy statement that contains all material facts. Once all
required approvals have been obtained (from shareholders, regulatory bodies, etc.), legal
advisors file documentation as specified by the regulator (Ministry of Corporate Affairs, SEBI
– if any of the companies are listed) and then the transaction is deemed complete. Agreed-
upon consideration is paid to target shareholders, and the companies are officially and legally
combined.

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HOSTILE MERGERS
When the target’s management or Board of Directors are not receptive to the idea of a merger,
the acquirer may take the deal directly to the target’s shareholders through a tender offer or a
proxy fight.
In a tender offer:
• The acquirer invites target shareholders individually to submit their shares for a payment.
• The payment can be in the form of cash, shares of the acquirer, other securities, or a
combination of cash and securities.
In a proxy fight:
• The acquirer approaches target shareholders to vote for an acquirer-nominated board of
directors which, if elected, is then able to replace the target’s management, and turn the
transaction into a friendly merger.
• Proxy solicitation is approved by regulators and then proxies are mailed directly to target
shareholders.
TAKEOVERS
When faced with a hostile tender (takeover) offer, the target’s board of directors can
(i) sell the company, either to the bidder or a third party or
(ii) try to remain independent.
The determination of the target to resist overtures from the acquirer depends on
(i) the strength of the company’s takeover defences,
(ii) management’s resolve to remain independent, and
(iii) the premium above the target’s market price offered by the acquirer.
The target may use defensive measures to delay, negotiate a better deal for its shareholders,
or try to keep the company independent. Takeover defences can be classified as pre-offer
defences and post-offer defences.’
• Poison pills grant a company the right to issue stock options to existing shareholders
enabling them to purchase additional shares of stock at significantly discounted prices.
They effectively make it very expensive for the acquirer to take over the target without
approval of the target’s board of directors.
There are two types of poison pills:
(i) A “flip-in” allows existing shareholders (except the acquirer) to buy more shares of the
target at a discount.
(ii) A “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price
after the merger.
• Poison puts give target company bondholders the right to sell their bonds back to the
target at a pre-specified redemption price (typically par value or above) in the event of

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a takeover. This means that if the acquirer takes over the target, it would need to raise a
substantial amount of cash to refinance the target’s debt.
• Share repurchase: The target may repurchase its shares from shareholders. This can
increase the cost of a takeover for the acquirer by increasing the stock’s price, or by causing
the acquirer to increase its bid to remain competitive with the target’s offer for its own
shares. If financed by issuing debt, share repurchases can increase the target’s leverage
(“leveraged recapitalisation”), which makes it less attractive as a takeover target.
• “Crown jewel” defence: The target sells off a valuable asset or a division to make the firm
less attractive to the would-be acquirer. However, if the sale is initiated after a hostile bid,
there is a chance that courts would deem the sale illegal.
• White knight defence: The target encourages a third firm (that is more acceptable to
target company management) to acquire the target company. The entrance of a white
knight may ignite a bidding war for the target, which may result in improved terms being
offered to target shareholders. It may also result in the eventual acquirer suffering a
winner’s curse (overpaying for the company).
TARGET MANAGEMENT ENTRENCHMENT
Managerial entrenchment can be defined as an action, such as investing corporate funds, that
is made by a manager in order to boost his or her perceived value as an employee, rather than
to benefit the company financially or otherwise.
Managers may sometimes hold little equity and shareholders are too dispersed to take action
against non-value maximization behaviour. So it is possible that the acquirer will lay off the
target’s management after acquisition. Giving ownership to a manager within a company may
translate into greater voting power which makes the manager’s workplace more secure. Hence,
they gain protection against takeover threats and the current managerial market.
Examples of entrenchment strategies
There are a variety of entrenchment practices that managers may employ.
• Poison pills – as discussed above, a poison pill gives current shareholders the right to
purchase additional shares of the company at extremely attractive prices which causes
dilution and effectively increases the cost to the potential acquirer.
• Restricted Voting rights – it is common to issue shares of differential voting rights so
that control can be retained with some key promoters even if the shares are transferred. In
some cases, equity ownership above a certain threshold (e.g. 15%) triggers a loss of voting
rights and required board approval. This forces the bidder to negotiate with the board
directly.
• Golden parachutes are compensation arrangements between the target and its senior
management where the managers get lucrative cash payouts if they leave the target
company after a merger. These contracts given to key executives and can be used as a type
of anti-takeover measure taken by a firm to discourage an unwanted takeover attempt.

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3.1 Anti-trust and Security Issues

Historically, regulators used market share as a measure of market power to determine whether
there were antitrust violations among competitors in an industry. This was done using a
simple measure of industry concentration along with market share information. Companies
contemplating a merger could determine in advance whether they would be in violation if
they were to merge. The approach is transparent and predictable but is deemed too simplistic
and rigid.
The Herfindahl-Hirschman Index (HHI) is considered to be a better measure of assessing
market concentration. The HHI measure sums the squares of each company’s market share
(based on sales) in the industry. Not only is it easy to calculate and interpret, but the HHI is also
more effective at modelling market concentration.
2
N
Sales of firm i 
HHI     100 
i  Total sales of the market 

Students should recall that Sales of the firm / Total Sales = market share
HHIs are calculated based on post-merger market shares.
• An HHI of less than 1,000 suggests that the market is not concentrated.
• An HHI between 1,000 and 1,800 suggests that the market is moderately concentrated.
• An HHI above 1,800 suggests that the market is highly concentrated.
In India, Competition Commission of India regulates the industry concentration to protect
consumers’ interests.

3.2 Post Transactions Value incorporating effect of intended synergies

Analysis of M&A Transactions involves identification of economic gains from the transaction.
If the combined entity is more than the sum of its parts, the transaction is said to have created
synergies. The difference between the combined value and the sum of the parts of individual
companies is usually attributed to synergy.
Combined Value = Value of Acquirer + Standalone value of the target + Synergy
Since in many cases, the acquirer ends up paying a premium over the standalone fair value of
the company, the synergy may not occur unless the premium paid is recovered. Further, there
re costs of integration as well.
Therefore, the Net Gain = Value of synergy - premium paid – Cost of integration
While assessing synergies, operating improvements are a big source of value creation. Better
post-merger integration could lead to abnormal returns even when the acquired company is in
unrelated business. Managerial talent is an important instrument in creating value by cutting
down costs, improving revenues and improving margins. Many executive compensation is

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tied to the performance in the post-merger. Providing equity stake in the company induces
executives to think and behave like shareholders.
VALUING CONTROL:
The safest way to value a target firm is in steps starting with the status quo valuation of the firm
and following up with a value for control. We start our valuation of the target firm by estimating
the firm value with existing investment, financing and dividend policies. This valuation, which
we turn the status quo valuation provides a base from which we can estimate control and
synergy premiums.
Many hostile takeovers are justified based on the existence of a market for corporate control.
Investors and firms are willing to pay large premiums over the market price to control the
management of firms, especially those that they perceive to be poorly run. This section explores
the determinants of the value of corporate control and attempts to value it in the context of an
acquisition in general the value of control will be much higher for a poorly managed firm that
operates at below-optimum capacity than for a well-managed firm. The value of controlling
a firm comes from changes made to existing management policy that can increase the firm
value. Assets can be acquired or liquidated the financing mix can be changed the dividend
policy re-evaluated and the firm restructured to maximise value. The value of the control can
be written as:
Value of Control = Value of the firm (optimally managed) – Value of the firm (with current management)
VALUING SYNERGY:
As discussed earlier, synergies may be obtained in various forms in case of mergers and
acquisitions. However, some experts believe that synergy may not be valued. One school of
thought argues that synergy is too nebulous to be valued and that any systematic attempt to
do so requires so many assumptions that it is pointless. If this is true a firm should not be willing
to pay large premiums for synergy if it cannot attach a value to get.
As valuers we maintain that synergy can be valued.
Assessment of synergies requires assessment of various questions.
• What form is the synergy expected to take?
• Will it reduce cost as a percentage of sales and increase profit margins?
• Will it increase future growth or length of the growth period?
• When will the synergies start affecting the cash flows post acquisition?
To influence value, synergy has to influence one of the 4 inputs to the valuation process - cash
flows from existing assets, higher expected growth rates, a longer growth period or a lower cost
of capital. Since value of synergies is the present value of the cash flows created by it, longer it
takes for it to show up, the lesser its value. The value of synergy can be estimated similarly as we
have assessed the value of control.
• Step 1: Value the firms involved in the merger independently by discounting expected
cash flows to each firm at the weighted average cost of capital for that firm

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• Step 2: Estimate the value of the combined firm with no synergy by adding the values
obtained for each firm in the first step.
• Step 3: Build in the effects of synergy into expected growth rates and cash flows and value
the combined firm with synergy.
• Step 4: The difference between the value of the combined firm with synergy and the value
of the combined firm without synergy provides a value for synergy.

3.3 Exit strategies

Exit strategies involve Mergers and Acquisitions, IPOs, selling stakes to investors, family
succession among others.
M&A deals: A merger or acquisition is a strong exit plan option for any company with their
business for sale. This is one of the strongest exit strategies for business owners, as they can
maintain control over price negotiations and set their own terms. However, M&A processes can
be time-consuming and costly, and even fail.
Selling the stake to an investor: Shareholders can sell their stake to their partners or investors
so that the business can run even if the shareholders exit the business. The term ‘friendly buyer’
is often used in this type of exit strategy, as it’s likely that you would sell your stake to someone
known and trusted. The company can continue to run with minimal disruption to business
as usual, keeping revenue streams steady. It’s possible that the potential buyer already has a
vested interest in the business and is committed to its success in the long term.
However, finding a buyer or investor for the company can be difficult. Also, getting the right is
difficult. Very often, businesses fail after M&As.
Acquihires : Acquihires is a business exit strategy where a company is bought solely to acquire
its talent. This type of acquisition can be very beneficial to skilled employees as they will be well
looked after once the business itself is sold.
Management and employee buyouts: In management buyouts, those already working
within the business are able to transition into more senior roles to fill the gap in leadership. As
the management team is already familiar with your business, they should be well equipped to
manage the company.

3.4 Tax implications

Tax implications are some of the most common and influential factors affecting mergers and
acquisitions. In fact, Tax is often the primary reason for mergers and acquisitions. If the M&A
transaction is structured properly, an organization can save a lot of money through tax benefits.
The Income Tax Act of 1961 includes various provisions that talk about dealing with taxation in
different ways of structuring. M&A transactions are carried in various ways.

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DEFINITIONS
Amalgamation
“Amalgamation”, in relation to companies, means the merger of one or more companies with
another company or the merger of two or more companies to form one company (the company
or companies which so merge being referred to as the amalgamating company or companies
and the company with which they merge or which is formed as a result of the merger, as the
amalgamated company) in such a manner that –
(a) all the property and liabilities of the amalgamating company or companies immedi-
ately before the amalgamation becomes the property and liabilities of the amalgamated
company by virtue of the amalgamation;
(b) shareholders holding not less than three-fourths in value of the shares in the amalgamat-
ing company or companies (other than shares already held therein immediately before
the amalgamation by, or by a nominee for, the amalgamated company or its subsidi-
ary) become shareholders of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another
company pursuant to the purchase of such property by the other company or as a result
of the distribution of such property to the other company after the winding up of the first-
mentioned company;
Demerger
“Demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement
under the Companies Act, by a demerged company of its one or more undertakings to any
resulting company in such a manner that –
(a) all the property and liabilities of the undertaking, being transferred by the demerged
company, immediately before the demerger, becomes the property and liabilities of the
resulting company by virtue of the demerger;
(b) the property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immedi-
ately before the demerger (except in case where the values are recorded at different values
as per Ind AS).
(c) the resulting company issues, in consideration of the demerger, its shares to the share-
holders of the demerged company on a proportionate basis except where the resulting
company itself is a shareholder of the demerged company;
(d) the shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by
a nominee for, the resulting company or, its subsidiary) become shareholders of the result-
ing company or companies by virtue of the demerger, otherwise than as a result of the
acquisition of the property or assets of the demerged company or any undertaking thereof
by the resulting company;
(e) the transfer of the undertaking is on a going concern basis;

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(f ) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of
section 72A by the Central Government in this behalf.
Slump Sale
“Slump sale” means the transfer of one or more undertaking, by any means, for a lump sum
consideration without values being assigned to the individual assets and liabilities in such
sales.
Tax exemption in case of Merger / Amalgamation
The Income Tax Act, 1961 doesn’t define the term merger but only defines an “amalgamation” as
defined under Section 2(1B) as “the merger of one or more companies with another company,
or the merger of two or more companies to incorporate a new company.”
For the provisions of the act, the company which is being merged is called the ‘amalgamating
company’ and the company into which it merges or the resulting company as the outcome
of the merger is called the ‘amalgamated company’. The company which has been merged
ceases its corporate identity from the day the amalgamation is effective. A merger requires
approval of the National Company Law Tribunal (NCLT) and it is typically processed through an
arrangement as specified under Section 230 to 232 of the Companies Act, 2013.
The Income Tax Act, 1961 provides that
• in an amalgamation all the assets and liabilities of the amalgamating company
immediately preceding the amalgamation must become the assets and liabilities of the
amalgamated company as an outcome of the amalgamation.
• At least 3/4th of the shareholders in the amalgamating company shall become
shareholders of the amalgamated company as an outcome of the amalgamation.
Hence, only when a merger transaction follows the above mentioned two conditions, it can be
termed as an amalgamation for the purposes of The Income Tax Act.
Section 47 (Capital Gains – transactions not regarded as transfer) of the Income Tax Act
specifically exempts the following from Capital Gains:
47(iv) any transfer of a capital asset by a company to its subsidiary company, if –
(a) the parent company or its nominees hold the whole of the share capital of the subsidi-
ary company, and
(b) the subsidiary company is an Indian company;
(v) any transfer of a capital asset by a subsidiary company to the holding company, if—
(a) the whole of the share capital of the subsidiary company is held by the holding
company, and
(b) the holding company is an Indian company :
(vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company
to the amalgamated company if the amalgamated company is an Indian company;

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(vi a)any transfer, in a scheme of amalgamation, of a capital asset being a share or shares
held in an Indian company, by the amalgamating foreign company to the amalga-
mated foreign company, if—
(a) at least 25 percent of the shareholders of the amalgamating foreign company continue
to remain shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgam-
ating company is incorporated;
(viaa) any transfer, in a scheme of amalgamation of a banking company with a banking
institution sanctioned and brought into force by the Central Government under section
45 (7) of the Banking Regulation Act, 1949 (10 of 1949), of a capital asset by the banking
company to the banking institution.
(viab) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a
foreign company, referred to in section 9 (1)(i) explanation 5, which derives, directly or
indirectly, its value substantially from the share or shares of an Indian company, held by the
amalgamating foreign company to the amalgamated foreign company, if—
(A) at least 25 percent of the shareholders of the amalgamating foreign company continue
to remain shareholders of the amalgamated foreign company; and
(B) such transfer does not attract tax on capital gains in the country in which the amalgam-
ating company is incorporated;
(vib) any transfer, in a demerger, of a capital asset by the demerged company to the
resulting company, if the resulting company is an Indian company;
(vic) any transfer in a demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company, if—
(a) the shareholders holding not less than three-fourths in value of the shares of the
demerged foreign company continue to remain shareholders of the resulting foreign
company; and
(b) such transfer does not attract tax on capital gains in the country, in which the demerged
foreign company is incorporated :
(vicc) any transfer in a demerger, of a capital asset, being a share of a foreign company,
referred to in section 9 (1)(i) explanation 5, which derives, directly or indirectly, its value
substantially from the share or shares of an Indian company, held by the demerged foreign
company to the resulting foreign company, if—
(a) the shareholders, holding not less than three-fourths in value of the shares of the
demerged foreign company, continue to remain shareholders of the resulting foreign
company; and
(b) such transfer does not attract tax on capital gains in the country in which the demerged
foreign company is incorporated:
(vid) any transfer or issue of shares by the resulting company, in a scheme of demerger to
the shareholders of the demerged company if the transfer or issue is made in consideration
of demerger of the undertaking;

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(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share
or shares held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment to him of any share or shares in
the amalgamated company except where the shareholder itself is the amalgamated
company, and
(b) the amalgamated company is an Indian company;
In a situation of a tax neutral demerger, there shall be no capital gains tax on the demerging
company on any transfer of capital assets to the resulting company (If an Indian company).
When there is a demerger of a foreign entity into a subsequent foreign entity where the capital
assets are transferred, there shall be no tax implication on the capital gains in India if the
following are complied with
• A minimum of 75% of shareholders of the demerging foreign company remain
shareholders of the resulting foreign company.
• The country in which the demerging foreign company is incorporated, the said demerger
is not chargeable to capital gains tax.
Amortisation of expenditure in case of amalgamation or demerger
Sec 35DD Provides that where an assessee, being an Indian company, incurs any expenditure,
wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the
assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure
for each of the five successive previous years beginning with the previous year in which the
amalgamation or demerger takes place.
Set off and carry forward of losses and unabsorbed depreciation
Subject to certain conditions of Sec 72A and 72AA, the accumulated loss and the unabsorbed
depreciation of the amalgamating company shall be deemed to be the loss or, allowance for
unabsorbed depreciation of the amalgamated company for the previous year in which the
amalgamation was effected.
The accumulated loss shall not be set off or carried forward and the unabsorbed depreciation
shall not be allowed in the assessment of the amalgamated company unless -
(a) the amalgamating company -
(i) has been engaged in the business, in which the accumulated loss occurred or depre-
ciation remains unabsorbed, for three or more years;
(ii) has held continuously as on the date of the amalgamation at least three-fourths of the
book value of fixed assets held by it two years prior to the date of amalgamation;
(b) the amalgamated company -
(i) holds continuously for a minimum period of five years from the date of amalgamation
at least three- fourths of the book value of fixed assets of the amalgamating company
acquired in a scheme of amalgamation;

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(ii) continues the business of the amalgamating company for a minimum period of five
years from the date of amalgamation;
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business
of the amalgamating company or to ensure that the amalgamation is for genuine
business purpose.
Business losses and unabsorbed depreciation of an amalgamating company may be allowed
to be carried forward and set off in the hands of the amalgamated company, subject to the
satisfaction of certain conditions. Business losses may be carried forward for eight years
pursuant to a merger, subject to certain conditions.
In the case of a demerger, the accumulated losses and unabsorbed depreciation of the
demerged company would be allowed to be carried forward and set off in the hands of a
resulting company, subject to the satisfaction of certain conditions. Accumulated business
losses are permitted to be carried forward for the unexpired period and depreciation can be
carried forward indefinitely.
Carry forward of tax losses & unabsorbed depreciation:
The resulting company is to carry forward the accumulated tax losses and depreciation which
is unabsorbed of the undertaking where:
The company which is being transferred has a direct relation to it.
There is no direct relation to it, then it has to be segregated between the demerging company
and the resulting company in exactly the same percentage in which the assets have been
ascertained by the demerging company and the resulting company.
Cost of assets & depreciation in the statement of the Demerging company qua the assets
transferred, the opening written down value of the assets which are transferred is written down
as the same value.
The demerging company is allowed a deduction in the tax treatment in respect of expenses
incurred on the demerger transaction equally for 5 years commencing from the year the
demerger takes place.
Slump Sale
Gains arising on the transfer of an undertaking for a lump sum consideration, without
assigning consideration toward any of the assets individually, is chargeable to tax as per the
special provisions as contained under the Act. Capital gains for the purposes of a slump sale
are computed as the difference between the sales consideration (less expenditure incurred in
relation to the transfer) and the net worth of the undertaking.
Pursuant to amendment vide the Finance Act, 2021 (Finance Act), it has been clarified that a
slump exchange is covered within the ambit of taxation. Pursuant to an amendment vide the
Finance Act, the sales consideration has now been linked to the Fair Market Value (FMV) of
capital assets, as on the date of transfer, and where such sales consideration is lower than the
FMV, such that the FMV would be considered as the full value of consideration for the purpose
of computing capital gains. This is to be calculated as per Rule 11UAE of Income Tax Rules.

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• In a scheme of amalgamation where the amalgamated company is an Indian company,

any transfer of a capital asset by an amalgamating company to the said amalgamated
company shall be exempted.
• In a scheme of amalgamation where there is a transfer of shares by a shareholder subject
to the following 2 conditions getting satisfied:
• The transfer is made in consideration of the allotment to him of any share or shares in
the amalgamated company except where the shareholder itself is the amalgamated
company, and
• The amalgamated company is an Indian company;
The calculation of the acquisition of shares for such shareholders will be done at the cost at
which the shares of the amalgamating company had been acquired by the shareholder.
The period of the holding shall include the period during which the shares were held by the
shareholders of the amalgamating company.
In a scheme of amalgamation, any transfer of a capital asset such as being a share or shares
held in an Indian company, by the amalgamating foreign company to the amalgamated foreign
company, if
• A minimum of 25% of the shareholders of the amalgamating foreign company carry on as
shareholders of the amalgamated foreign company, and
• In the country where the amalgamating country is incorporated, no tax is levied on capital
gains in an amalgamation scheme between 2 foreign companies where as a consequence
the transfer results in an indirect transfer of Indian shares along with the conditions as
specified above, tax exemption can be availed.
An amalgamation between two or more foreign companies can be exempted from tax in India
for the amalgamating foreign company, however, it will definitely result in Indian Capital Tax
gains for the shareholders.
INDIRECT TAXES
As in an Amalgamation/ Merger, there is a transfer of the company on a going-concern basis
the Goods & Services Tax is not usually applicable. However, it has been stated under Section
18(3) of the Central Goods & Services Tax Act, 2017 that availability of the input tax credit
furnishes that where there is a change in the constitution of a registered person on account of
an amalgamation, transfer of unutilized input tax credit in the electronic credit ledger shall be
permitted if certain conditions are satisfied.
STAMP DUTY
In India, the constitution segregates the power between the Centre and the State Government
towards levying stamp duty. Stamp duty is always paid when a Sale Deed or a Deed of
Conveyance is executed. The central Government enacts The Indian stamp Act of, 1899 which
may or may not be adopted by the states. Certain states in India have their own respective
stamp acts.

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1
Aruna has been assigned the task of estimating a fair acquisition price for Mani Ltd. She decides
to use comparable company analysis to determine a fair acquisition price and gathers the
following information regarding three comparable companies.

Company A Company B Company C

Price Per share (₹) 240.00 150.00 300.00
Earnings Per Share (₹) 14.50 9.57 19.00

She has also gathered the following information relating to recent acquisitions of companies
that are like Mani Ltd.

Company P Company Q Company R

Market Price 92.45 357.50 224.00
Deal price 117.00 425.00 290.00

The expected EPS of Mani Ltd is ₹15.

Calculate the expected Deal Price that should be offered for the acquisition.

Deal Price

Answer
The Average P/E can be calculated as

Company A Company B Company C Average

Price Per share (₹) 240.00 150.00 300.00
Earnings Per Share (₹) 14.50 9.57 19.00
P/E 16.55 15.67 15.79 16.0

Accordingly, the Intrinsic value of Mani Ltd can be calculated based on P/E Multiple.
Intrinsic Price = Expected EPS × Average P/E Multiple of comparable companies
= ₹15 × 16
= ₹240.06

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The Average Acquisition Premium is calculated based on recent comparable transactions

Company P Company Q Company R Average

Market Price (₹) 92.45 357.50 224.00
Deal price (₹) 117.00 425.00 290.00

Acquisition Premium (117 – 92.45) / 18.9% 29.5% 25.0%

92.45 × 100
= 26.6%

Deal price = Intrinsic Price × (1 + Acquisition Premium)

= ₹240.06 × (1+25%)
= ₹300

2
Yasmin has been assigned to evaluate the acquisition price of HBR Ltd. The information about
HBR Ltd is given below.

Price per share (₹) 11

Shares (₹ Million) 50
Debt (₹ Million) 500
Revenue LTM (₹ Million) 700
EBITDA (₹ Million) 125
EPS (₹) 0.9

Yasmin has assessed some recent comparable transactions

EV / LTM EV / LTM Equity / LTM

Acquirer Target Equity EV
Sales EBITDA PE
A P 200 500 1.0 9.0 17.0
B Q 125 250 1.7 12.0 15.0
C R 700 100 2.2 14.5 20.0
D S 1,200 1,000 0.9 8.5 14.0
E T 200 400 2.5 11.0 22.0

You are required to assess the acquisition price and its premium against the current market
price using average values.

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Deal Price Premium

Answer
Calculation of average multiples

Acquirer Target EV / LTM Sales EV / LTM EBITDA Equity / LTM PE

A P 1.0 9.0 17.0
B Q 1.7 12.0 15.0
C R 2.2 14.5 20.0
D S 0.9 8.5 14.0
E T 2.5 11.0 22.0
Average 1.7x 11.0x 17.6x

Particulars EBITDA Multiple Sales Multiple Earnings Multiple

EBITDA Revenue EPS
Reported Value 125.0 700.0 0.9
Value multiplier 11.0x 1.7x 17.6
Enterprise Value 1,375.0 1,162.0
Less: Debt 500.0 500.0
Equity Value 875.0 662.0
No. of shares 50 50
Value per share 17.5 13.2 15.8
Premium over Current Price 59.1% 20.4% 44.0%

3
Ace Ltd is considering the acquisition of Base Ltd. Ace’s management estimates that the
acquisition will create a synergy worth ₹ 110 million. The following information is provided.

Ace Ltd Base Ltd

Value of the Company (₹ Million) 1,920 525
Number of Shares (Million) 80 35
Value Per Share (₹) 24 15

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The Management of Ace Ltd is evaluating three options for Base Ltd.
Option 1: Cash Offer of ₹ 17 per share
Option 2: Share Exchange ratio of 0.7 shares of Ace against each share of Base Ltd
Option 3: Share Exchange ratio of 0.5 shares of Ace against each share of Base, plus ₹ 5 per
share
You are required to evaluate the option that will best suit Ace Ltd and the one that will best
suit Base Ltd.

Evaluation of best offer for Acquirer &

Target

Answer
Option 1
Being the Cash offer, the shareholders of Base Ltd will get cash compensation.
Consideration paid = Offer Price × Number of shares of Base Ltd
= ₹ 17 × 35 million = ₹ 595 million
Acquisition Premium = (Deal Price – Premerger Price of Target) × Number of shares of Base
Or Consideration Paid – Pre-merger value of the Target
= (17 – 15) × 35 or ₹ (595 – 525) million = ₹ 70 million
Acquirer’s Gain = Value of Synergy – Acquisition Premium paid
= 110 – 70 = ₹ 40 million
Option 2
Being stock offer, the shareholders of Base Ltd will get the shares of Ace Ltd. Their compensa-
tion would be valued based on the post-merger value of Ace Ltd.
Share Exchange ratio of 0.7 shares of Ace against each share of Base Ltd
Number of shares to be issued = Share Exchange Ratio X Number of Shares of Base Ltd
= 0.7 × 35 million = 24.5 million
Value of Combined Entity = Pre-Merger Value of Acquirer + Pre-Merger Value of Target +
Expected synergies from transaction + Cash Paid
= 1,920 + 525 + 110 – 0 = ₹ 2,555 million

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Total Number of shares of the Combined Entity

= Pre-merger shares of Acquirer + Number of shares issued as part of transaction
= 80 + 24.5 = 104.5 million
Post-Merger Value per share = Value of Combined Entity / Number of shares of combined entity
= ₹ 2,555 million / 104.5 million = ₹ 24.4 per share
Total Value paid to Target (Base Ltd) = Number of shares issued × Post Merger value per share
= 24.5 million × ₹ 24.4 per share = ₹ 599 million
Acquisition Premium = Value paid to Target – Pre-Merger Value of Target
= ₹ 599 million – ₹ 525 million = ₹ 74 million
Acquirer’s Gain = Total Expected Synergy – Acquisition Premium paid to Target
= ₹ 110 million – ₹ 74 million = ₹ 36 million
Option 3
In this option, the Acquirer is paying both Cash and shares of its own company to the
shareholders of the Target Company.
Total Cash consideration Paid = Cash offer per share × Number of Shares of Target
= ₹ 5 per share × 35 million shares = ₹ 175 million
Shares issued by Acquirer (Ace) = Share Exchange Ratio × Number of shares of Base
= 0.5 × 35 = 17.5 million shares

Pre-Merger Value of Acquirer ₹1,920.0

Pre-Merger Value of Target ₹525.0
Expected synergies from transaction ₹110.0
Cash Paid ₹175.0
Post-Merger Value of Combined Entity (₹ Mn) ₹2,380.0

Number of shares of combined entity = Pre-merger shares of Ace + Number of shares issued
= 80 + 17.5 = 97.5 million shares
Post-Merger Value per share of combined entity = 2,380 / 97.5 = ₹ 24.4 per share
Value Paid to the Target = Cash paid + Value of Shares paid
= ₹ 175 million + ₹ 24.4 per share × 17.5 million shares
= ₹ 602.2 million

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Acquisition Premium = Value Paid – Pre-merger value of Target

= ₹ 602.2 million – ₹ 525 million = ₹ 77.2 million
Acquirer’s Gain = Total Synergy – Acquisition Premium
= 110 – 77.2 = ₹ 32.8 million
Summary of three options

Option 1 – Cash 70.0 40.0 Acquirer’s Preference

Option 2 – Stock 74.0 36.0
Option 3 - Mix 77.2 32.8 Target’s Preference

4
Anju consultancy Ltd. has been assigned the task of estimating a fair acquisition price for Atul
Industries. Anju consultancy decides to use comparable company analysis to determine a fair
acquisition price and collects the following significant information regarding three comparable
companies:

Company X Company Y Company Z

Price per share (₹) 240 150 300
Earnings per share 14.50 9.57 19.00

Anju consultancy has also collected the following information relating to recent acquisitions of
similar companies like Atul Industries:

Company A Company B Company C

Market Price 92.45 357.50 224.00
Deal price 117.00 425.00 290.00

The expected earnings per share of Atul industries is ₹ 15. You are required to Assess the
expected Deal Price that should be offered for the acquisition.

Deal Price

Answer
Expected Deal price = ₹ 300

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5
ABC Ltd. run and managed by an efficient team that insists on reinvesting 60% of its earnings
in projects that provide an ROE (return of equity) of 10%, despite the fact that the firm’s
capitalization rate (K) is 15%. The firm’s current year’s earning is ₹ 10 per share.
At what price the stock of ABC Ltd. sell? What is the present value of growth opportunities?
Why would such a firm be a takeover target?

PV of Growth Opportunity

Answer
Dividend growth rate G = ROE × b
Where, b = 1 – payout ratio
G = 10% × 0.60 = 6%
10 × 0.4 4
Stock price of ABC Ltd. = = = ₹ 44.44
0.15 – 0.06 0.09
Present value of growth opportunities (PVGO)
= market price per share – No growth value per share

 10 
= ₹ 44.44 –  
 0.15 

= ₹ 44.44 – 66.66
= ₹ (–22.22) i.e. negative PVGO
Reasons for takeover target – Negative PVGO implies that the net present value of the firm’s
projects is negative; the rate of return on those assets is less than the opportunity cost of
capital. Such a firm would be subject to takeover target because another firm could buy the
firm for the market price of INR 44.44 per share and increase the value of the firm by changing
its investment policy. For example, if the new management simply paid out all earning as
dividend, the value of the firm would increase up to its no growth value of ₹ 66.66.

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6
Value of target Co. is ₹ 500 Million
Value of the acquiring Co. is ₹ 800 Million.
Present value of cost savings if the two companies are merged together is ₹ 100 million.
Acquiring company expects the cost of integration as ₹ 80 million and the shareholders of
Target Co. are expecting a deal premium to be paid of 15 percent over their company’s value.
What is the value of Combined entity? Does the merger result in a net gain for the combined
entity?

Value of Combined Entity with Synergy,

Net Gain for Combined Entity

Answer
Premium Paid = 500 × 0.15 = 75 million
Synergy = 100 million
Combined Value = Value of Target Co. + Value of Acquiring Co. + Synergy
= 500 + 800 + 100 = ₹ 1,400 million
Net Gain / Loss = Synergy – Premium Paid – Cost of Integration
= 100 – 75 – 80 = Loss of ₹ 55 million

7
Acquirer Ltd is proposing to acquire Target Ltd.

Expected Post Merger Combined Profit of Acquirer ₹2,000

Pre-merger Profit of Acquirer ₹1,200
Standalone number of shares of Acquirer ₹200
New shares to be issued in transaction ₹50
Tax Rate ₹25%

Calculate:
1. Combined EPS
2. Accretion / (Dilution) in ₹ and in Percentage

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EPS, Accretion/Dilution

Answer
1. Calculation of Combined EPS

Combined Profit ₹2,000

Combined Number of Shares (200 + 50) ₹250
Combined Post Merger EPS (Profit / No. of Shares) ₹8

2. Calculation of Accretion / Dilution

Standalone Pre-merger EPS (1,200 / 200) ₹6.00

Accretion / (Dilution) [8 – 6] ₹2.00
Accretion Percentage [2 / 6] 33.3%

8
Company X is contemplating the purchase of Company Y, Company X has 3,00,000 shares
having a market price of ₹ 30 per share, while Company Y has 2,00,000 shares selling at ₹ 20 per
share. The EPS are ₹ 4.00 and ₹ 2.25 for Company X and Y respectively. Managements of both
companies are discussing two alternative proposals for exchange of shares as indicated below:
(a) in proportion to the relative earnings per share of two Companies.
(b) 0.5 share of Company X for one share of company Y (0.5: 1).
You are required:
(i) to calculate the Earnings Per Share (EPS) after merger under two alternatives; and
(ii) to show the impact on EPS for the shareholders of two companies under both alternatives.

EPS, Impact on Shareholders

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Answer
Working Notes:
Computation of total earnings after merger

Particulars Company X Company Y Total

Outstanding shares 3,00,000 2,00,000
EPS (INR) 4 2.25
Total earnings (INR) 12,00,000 4,50,000 16,50,000

(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 × 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
(b) Calculate of EPS when share exchange ratio is 0.5:1
Total earnings after merger = ₹ 16,50,000
Total number of shares after merger = 3,00,000 + (2,00,000 × 0.5) = 4,00,000 shares EPS
after merger = ₹ 16,50,000 / 4,00,000 = ₹ 4.125
(ii) Impact of merger on EPS for shareholders of Company X and Company Y
(a) Merger took place on relative EPS of two companies; therefore, both companies
maintain their EPS and no impact on EPS of shareholders of both companies.
(b) Impact on Shareholders of Company X
Particulars (INR)
EPS before merger 4.000
EPS after merger 4.125
Increase in EPS 0.125

Impact on shareholders of Company Y

Particulars (INR)
EPS before merger 2.25
Equivalent EPS after merger (4.125×0.5) 2.0625
Decrease in EPS 0.1875

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9
The following information is provided in relation to the acquiring Mark limited and the target
Maverick Limited

Particulars Mark Limited Maverick Limited

Earnings after tax (INR) 200 lacs 40 lacs
Number of shares outstanding 20 lacs 10 lacs
P/E ratio 10 5

Required:
(i) What is the swap ratio in terms of current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition assuming
that P/E ratio of Mark limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.

Swap Ratio, EPS, MPS, Gain/Loss to

shareholders

Answer
(i) Calculation of Swap ratio:
Particulars Mark Limited Maverick Limited
Earnings after tax (INR ) 200 lacs 40 lacs
Number of shares outstanding 20 lacs 10 lacs
P/E ratio 10 5
EPS 200/20 =10 = 40/10 = 4
Market Price = (P/E × EPS) INR 100 INR 20

Therefore, swap ratio in terms of market prices

= MPS of target firm/ MPS of acquiring firm = 20/100 = 0.20
(ii) We have general formula given by:
 E A  EB 
EPSAB 
SA  SB ER A  

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200  40 240
Therefore, EPS of Mark Limited after acquisition =   INR 10.91
20  10  0.2 22
(iii) Expected market price per share of Mark Limited with the same P/E of 10 will be
= EPS × P/E = ₹ 10.91 × 10 = ₹ 109.10
(iv) Market Value of the merged firm
= Total number of outstanding shares × market price
= (20 + 2) lacs × ₹ 109.10 = ₹ 2,400.2 lacs
(v) Gain / Loss accruing to the shareholders of both companies
Particulars Total Mark Maverick
Number of shares after acquisition 22 lacs 20 lacs 2 lacs
Market price after acquisition INR 109.10 INR 109.10 INR 109.10
Total Market value after acquisition INR 2,400.2 lacs INR 2,182 lacs INR 218.2 lacs
Existing Market Value INR 2,200 lacs INR 2,000 lacs INR 200 lacs
Gain to shareholders INR 200.2 lacs INR 182 INR 18.2 lacs

10 
The following information is provided related to the acquiring firm Sun Ltd. and the target firm
Moon Ltd.:

Particulars Sun Ltd. Moon Ltd.

Profits after tax 2,000 lakhs 4,000 lakhs
Number of shares outstanding 200 lakhs 1,000 lakhs
P/E ratio (Times) 10 5

Required:
(i) What is the swap ratio based on current market price?
(ii) What is the EPS of Sun Ltd. after acquisition?
(iii) What is the expected market price per share of Sun Ltd. after acquisition, assuming P/E
ratio of Sun Ltd. adversely affected by 10%?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.

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Swap Ratio, EPS, MPS, MV, Gain/Loss to

Shareholders

Answer
EPS before acquisition
Sun Ltd. = ₹ 2,000 lakhs / 200 lakh = ₹ 10
Moon Ltd. = ₹ 4,000 lakhs / 1,000 lakh = ₹ 4
Market price of shares before acquisition
Sun Ltd. = ₹ 10 × 10 = ₹ 100
Moon Ltd. = ₹ 4 × 5 = ₹ 20
(i) Swap ratio based on current market price
INR 20
= 0.2 i. e., 1 share of Sun Ltd. for 5 shares of Moon Ltd.
INR 100

Number of shares to be issued = 1,000 lakhs × 0.20 lakh = 200 lakhs

(ii) EPS after acquisitions
2000 lakhs + 4000 lakhs
= ₹ 15
200 lakhs + 200 lakhs
(iii) Expected market price per shares of Sun Ltd. after an acquisition assuming P/E ratio
of Sun Ltd. is adversely affected by 10%.
EPS of Sun Ltd. = ₹ 15
P/E of Sun Ltd. = 10 – 10% of 10 = 9 times
Market price per share of Sun Ltd. = EPS × P/E ratio
= 15 × 9
= ₹ 135
(iv) Market value of merged firm
= ₹ 135 × 400 lakhs shares = ₹ 54,000 lakhs
(v) Gain from the Merger
Post-merger market value of merged firm = ₹ 54,000 lakhs
Less: Pre merger market value
Sun Ltd. 200 lakhs × ₹ 100 = 20,000 crores

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 Valuation in Mergers and Acquisitions

Moon Ltd. 1,000 lakhs × ₹ 20 = 20,000 crores

Total = ₹ 40,000 lakhs
Gain from merger = (54,000 – 40,000) = ₹ 14,000 lakhs
Gain to shareholders of Sun Ltd. and Moon Ltd.
(INR in Lakhs)
Particulars Sun Ltd. Moon Ltd.
Post-merger value (INR 135 × 200) 27,000
(INR 135 × 200) 27,000
Less: Pre merger value 20,000 20,000
Gain to shareholders 7,000 7,000

11 
The following information is provided related to the acquiring Firm Mark Limited and the target
Firm Mask Limited:

Particulars Firm Mark Limited Firm Mask Limited

Earnings after tax (INR) 2,000 lakhs 400 lakhs
Number of Shares Outstanding 200 lakhs 100 lakhs
P/E ratio (times) 10 5

Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition, assuming
P/E ratio of Mark Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.

Swap Ratio, EPS, MPS, MV, Gain/Loss to

Shareholders

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Answer
Particulars Mark Ltd. Mask Ltd.
EPS 2,000 Lakhs/ 200 Lakhs = 10 400 Lakhs/ 100 Lakhs = 4
Market price 10 × 10 = 100 4 × 5 = 20

(i) The Swap ratio based current market price is

20 /100 = 0.2 or 1 share of Mark Ltd. For 5 shares of Mask Ltd.
No. of shares to be issued = 100 Lakhs × 0.2 = 20 Lakhs
2,000 lakhs + 4,000 lakhs
(ii) EPS after merger = = 10.91
200 lakhs + 20 lakhs
(iii) Expected market price after merger assuming P/E 10 times.
= 10.91 × 10 = 109.10
(iv) Market value of merged firm
= 109.10 market price × 220 Lakhs shares = 240.02 crores
(v) Gain from the merger
Post-merger market value of the merged firm 240.02 crores
Less: Pre-merger market value
Mark Ltd. 200 Lakhs × ₹100 = 200 crores
Mask Ltd. 100 Lakhs × ₹20 = 20 crores 220.00 crores
Gain from the merger 20.02 crores
Appropriation of gains from the merger among shareholders:

12 
The following information is available to you in relation to the acquisition of Dean Limited and
the target Dale Limited.

Particulars Dean Limited Dale Limited

Earnings after tax (INR) 284 lacs 30 lacs
Number of shares outstanding 30 lacs 10 lacs
P/E ratio 10 5

Analyse the above information to determine the following:

(i) the swap ratio in terms of current market prices.
(ii) the EPS of Dean Limited after acquisition.

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 Valuation in Mergers and Acquisitions

(iii) the expected market price per share of Dean Limited after acquisition assuming that P/E
ratio of Dean Limited remains unchanged.
(iv) the market value of the merged firm.
(v) the gain/loss for shareholders of the two independent companies after acquisition.

Swap Ratio, EPS, MPS, MV, Gain/Loss to

shareholder

Answer
Particulars Dean Limited Dale Limited
Earnings after tax 284 lakhs 30 Lakhs
Number of shares outstanding 30 Lakhs 10 Lakhs
P/E ratio 10 5
EPS INR 9.47 INR 3
Market Price = (PE × EPS) INR 94.7 INR 15

Particulars
MPS of target firm 0.16
(i) Swap Ratio =
MPS of acquiring firm

E A  EB 284  30
(ii) EPS of Dean Limited after acquisition  INR 9.94
SA  SB ER A   30  10  0.16

(iii) Expected Market Price per share of Dean Limited with the same P/E INR 99.4
ratio of 10 will be [EPS × P/E] [9.94 × 10]
(iv) Market value of the merged firm INR 3,140
Total number of outstanding shares × market price (32 × 99.4) Lakhs

(v) Gain / Loss accruing to shareholders of both companies

Particulars Dean Limited Dale Limited Total

Number of shares after acquisition 30 Lakhs 2 Lakhs 32 Lakhs
Market Price after acquisition INR 99 INR 99 INR 99
Total Market Value after acquisition INR 2,982 Lakhs INR 158 Lakhs INR 3140 Lakhs
Existing Market Value INR 2840 Lakhs INR 150 Lakhs INR 2990 Lakhs
Gain To the shareholders INR 142 Lakhs INR 8 Lakhs INR 150 Lakhs

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13 
Highland Company is considering the acquisition of Lowland Company in a stock- for- stock
transaction in which Lowland Company would receive ₹ 90 for each share of its common stock.
Highland company does not expect any change in its price/ earnings ratio multiple after the
merger and chooses to value Lowland company conservatively by assuming no earnings
growth due to synergy.
Calculate:
(i) The purchase price premium
(ii) The exchange ratio
(iii) The number of new shares issued by Highland company.
(iv) Post-merger EPS of the combined firms
(v) Pre-merger EPS of the Highland company
(vi) Pre-merger P/E ratio
(vii) Post-merger share price
(viii) Post-merger equity ownership distribution.
The following additional information is available.

Particulars Highland Lowland

Earnings INR 2,50,000 INR 72,500
Number of Shares 1,10,000 20,000
Market Price per share INR 50 INR 60

Purchase Price Premium, Exchange Ratio,

No. of new shares to be issued, EPS, MPS,
Ownership Distribution

Answer
(i) Purchase price premium
= Offer price for Lowland company stock / Lowland company Market price per share
= 90 / 60 = 1.5
(ii) Exchange ratio
= Price per share offered for Lowland Company / Market Price per share for Highland
company
= 90 / 50 = 1.8

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Highland company issues 1.8 shares of stock for each of Lowland Company’s stock.
(iii) New shares issued by Highland company
= shares of Lowland Company × Exchange ratio
= 20,000 × 1.8 = 36,000.
(iv) Post-merger EPS of the combined companies
= Combined earning / Total number of shares.
Combined earnings = (2,50,000 + 72,500) = ₹ 3,22,500
Total shares outstanding of the new entity = 1,10,000 + 36,000 = 1,46,000
Post-merger EPS of the combined companies = ₹ 3,22,500 ÷ 1,46,000 = ₹ 2.21
(v) Pre-merger EPS of the Highland company
= earnings / Number of shares = 2,50,000 / 1,10,000 = ₹ 2.27
(vi) Pre-merger P/E
= Pre-merger market price per share / Pre-merger earnings per share
= 50 / 2.27 = 22.00
(vii) Post-merger share price = Post-merger EPS × Pre-merger P/E
= 2.21 × 22.00 = ₹ 48.60 (as compared to ₹ 50 Pre-merger)
(viii) Post-merger Equity Ownership Distribution
Lowland Company = Number of new shares / Total number of shares
= 36,000/ 1,46,000 = 0.2466 or 24.66%
Highland company = 100 – 24.66 = 75.34%
Comment – The acquisition results in a ₹ 1.40 reduction in the market price of Highland
company due to a 0.064 decline in the EPS of the combined companies. Whether the acquisition
is a poor decision depends upon what happens to the earnings would have in the absence of
the acquisition, the acquisition may contribute to the market value of Highland company.

14 
Raghav Ltd is intending to acquire Sourav Ltd. (by merger) and the following information are
available in respect of both the companies.

Particulars Raghav Ltd. Sourav Ltd.

Total current Earnings INR 2,50,000 INR 90,000
No. of Outstanding Shares 50,000 30,000
Market price per share INR 21 INR 14

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(i) What is the present EPS of both the companies?

(ii) If the proposed merger takes place what would be the new earnings per share for Raghav
Ltd. (assuming the merger takes place by exchange of equity shares and the exchange
ratio is based on the current market price)?
(iii) What should be the exchange ratio if Sourav Ltd. wants to ensure the same earnings to
members as before the merger took place?

EPS, Exchange Ratio

Answer
(i) EPS = total earnings/ No. of equity shares
EPSRLTD = 2,50,000/50,000 = ₹ 5
EPSSLTD = 90,000/30,000 = ₹ 3
(ii) No. of shares Sourav Ltd. shareholders will get in Raghav Ltd. based on market prices of
shares is as follows:
Exchange Ratio = 14/21 = 2/ 3 i.e. for every 3 shares of Sourav Ltd. 2 shares of Raghav Ltd.
14
Total No. of shares of R Ltd. Issued = × 30,000= 20,000 shares
21
Total number of shares of Raghav Ltd. After merger = 50,000 + 20,000 = 70,000
Total earning of Raghav Ltd after merger = 2,50,000 + 90,000 = 3,40,000
[Remember no synergy given]
INR 3,40,000
The new EPS of Raghav Ltd. After merger = = ₹ 4.86
70 , 000
(iii) Calculation of exchange ratio to ensure Sourav Ltd to earn the same before the
merger took place: Both acquiring and acquired firm can maintain their EPS only if the
merger takes place based on respective EPS.
Exchange Ratio based on EPS = 3/5 = 0.6
Total shares of Raghav Ltd. receivable by Sourav Ltd. shareholders = 0.6 × 30,000 = 18,000
Total No. of shares of Raghav LTD after merger = 50,000 + 18,000 = 68,000
EPS after merger = Total Earnings / Total no. of shares = [INR 2,50,000 + ₹ 90,000] / 68,000
= ₹ 5.00
Total earnings after merger of Sourav Ltd. = ₹ 5 × 18,000 = ₹ 90,000

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15 
Radha Limited is intending to acquire Krishna Limited by merger and the following information
is available in respect of both the companies:

Particulars Radha Limited Krishna Limited

No. of equity shares 6,00,000 2,00,000
Profit after tax INR 20,00,000 INR 10,00,000
Market Price Per Share INR 20 INR 15

Compute the following:

(i) EPS of both the companies
(ii) Exchange Ratio

EPS, Exchange Ratio

Answer
(i) EPS of both the companies :
EPS of Radha Limited = INR 3.33
EPS of Krishna Limited = INR 5.00
(ii) Exchange Ratio
Exchange ratio based on EPS = 1.5

16 
Anurag Ltd. is considering the acquisition of Binay Ltd. with stock. Relevant financial
information is given below.

Particulars Anurag Ltd Binay Ltd

Present Earnings INR 7.5 lakhs INR 2.5 lakhs
Equity (No. of shares) 4.0 lakhs 2.0 lakhs
EPS INR 1.875 INR 1.25
P/E ratio 10 5

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Answer the following question:

(i) What is the market price of each company?
(ii) What is the market capitalization of each company?
(iii) If the P/E of Anurag Ltd. changes to 7.5, what is the market price of Anurag Ltd?
(iv) Does market value of Anurag Ltd. change?
(v) What would be the exchange ratio based on Market Price? (Take revised Price of Anurag
Ltd).

MPS, Market Capitalisation, Change in MV,

Exchange Ratio

Answer
(i) P/E = Market Price/ EPS. Therefore, we have, Market price = P/E × EPS Anurag Ltd.’s Market
Price = 10 × 1.875 = ₹ 18.75
Binay Ltd.’s Market Price = 5 ×1.25 = ₹ 6.25
(ii) Market Capitalization (same as market value or in short referred as market Cap)
= Number of outstanding shares × market Price
Anurag Ltd.’s Market cap = 4.0 lakhs × ₹ 18.75 = ₹ 75 Lakhs Binay Ltd.’s market cap = 2.0
lakhs × ₹6.25 = ₹ 12.5 Lakhs
(iii) If the P/E of Anurag ltd. changes to 7.5, then the market price is given by
= 7.5 × ₹ 1.875 = ₹ 14.0625
(iv) Yes. The market value decreases. i.e., = Anurag Ltd.’s market Value = 4.0 lakhs × ₹ 14.0625 =
₹ 56.25 Lakhs.
MPS of Target Firm
(v) General Formula for exchange ratio = = 6.25/14.0625 = 0.44
MPS of Acquiring Firm

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17 
Abhishek Ltd. is considering takeover of Bikash Ltd. and Chitra Ltd. The financial data for the
three companies are as follows:

Particulars Abhishek Ltd. Bikash Ltd. Chitra Ltd.

Equity Shares Capital of ₹ 10 each (INR crores) 450 180 90
Earnings (INR crores) 90 18 18
Market price of each share (INR ) 60 37 46

Calculate:
(i) Price earnings ratios
(ii) Earnings per share of Abhishek Ltd. after the acquisition of Bikash Ltd. and Chitra Ltd.
separately. Will you recommend the merger of either/both of the companies? Justify your
answer.

P/E Ratio, EPS, Recommendation

Answer
(i) Calculation of Price Earnings ratios
Particulars Abhishek Ltd. Bikash Ltd. Chitra Ltd.
Earnings (INR crores) 90 18 18
No. of shares (crores) 45 18 9
EPS (INR ) 2 1 2
Market price of each share (INR ) 60 37 46
PE Ratio (MPS ÷ EPS) 30 37 23

(ii) Calculation of EPS of A Ltd. after acquisition of Bikash Ltd. and Chitra Ltd.
Particulars Abhishek Ltd. Bikash Ltd. Chitra Ltd.
Exchange ratio in A Ltd
Target’s Price per share / Acquirer’s price per -- 0.617 0.767
share)
No. of A Ltd.’s share to be given (crores) -- 18 × 0.617 9 × 0.767
(Target’s Number of shares × Share exchange = 11.10 = 6.90
Ratio)
Combined number of shares (crores) -- 56.1 51.9

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(Acquirer’s Pre acquisition Number of shares

+ shares issued to target’s shareholders)
Combined Earnings after acquisition (INR -- 108 108
crores)
(Acquirer’s Earnings + Target’s Earnings)
EPS after acquisition (INR) -- 1.93 2.08
(Combined Earnings / Combined Number of
shares)
Conclusion – comparison with pre- Lower Higher
acquisition EPS

Analysis: After merger of Chitra Ltd. with Abhishek Ltd.’s. EPS is higher than Abhishek Ltd.
(INR 2.08). Hence merger with only Chitra Ltd. is suggested to increase the value to the
shareholders of Abhishek Ltd.

18 
XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.’s shares are currently traded at ₹ 25. It
has 2,00,000 shares outstanding and its profits after taxes (PAT) amount to ₹ 4,00,000. ABC Ltd.
has 1,00,000 shares outstanding. Its current market price is ₹ 12.50 and its PAT are ₹ 1,00,000.
The merger will be affected by means of a stock swap (exchange). ABC Ltd. has agreed to a plan
under which XYZ Ltd. will offer the current market value of ABC Ltd.’s shares:
(i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
(ii) If ABC Ltd.’s P/E ratio is 8, what is its current market price? What is the exchange ratio?
What will XYZ Ltd.’s post-merger EPS be?
(iii) What must the exchange ratio be for XYZ Ltd.’s that pre and post-merger EPS to be the
same?

Pre Merger EPS, Post Merger EPS,

Exchange Ratio

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Answer
(i) Pre-merger EPS and P/E ratios of XYZ Ltd. and ABC Ltd.
Particulars XYZ Ltd. ABC Ltd.
Profit and taxes INR 4,00,000 INR 1,00,000
Number of shares outstanding 2,00,000 1,00,000
EPS (Earning after tax/No. of shares) INR 2 INR 1
Market price per share INR 25.00 INR 12.50
P/E Ratio (times) (MPS÷EPS) 12.50 12.50

(ii)
Particulars XYZ ABC
If ABC PE is 8. Market Price 8.00
Exchange Ratio = Transferor Price / Transferee Price 0.32
Number of shares to be issued
(Transferor’s old Number of shares × Exchange Ratio) 32,000
Total New Shares
(Transferee’s Old number of shares + New shares issued) 2,32,000
Total Earnings 5,00,000
New EPS 2.16

(iii) Desired exchange ratio

Total number of shares in post-merged company
Post-merged earnings 5, 00 , 000
= = = 2,50,000
Pre-merger EPS of XYZ Ltd. 2

Number of shares required to be issued = 2,50,000 – 200,000 = 50,000

Therefore, the exchange ratio is = 50,000/ 1,00,000 = 0.50

19 
Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The
particulars of 2 companies are given below:

Particulars RIL SIL

Earnings After Tax (INR) 20,00,000 10,00,000
Equity shares (No.) 10,00,000 10,00,000
EPS (INR) 2 1
P/E ratio (times) 10 5

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 Valuation in Mergers and Acquisitions

Required:
(i) What is the market value of each company before merger?
(ii) Assuming that the 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 for share? Are the sharehold-
ers of RIL better or worse off than they were before the merger?
(iii) Due to synergic effects, the management of RIL estimates that the earnings will increase by
20%.
(iv) What is the new post-merger EPS and price per share? Will the shareholders be better off
or worse off than before the merger?

MV, MPS, EPS, Impact on Shareholder

Answer
(i) Market value of companies before merger
Particulars RIL SIL
EPS (INR) 2 1
P/E ratio 10 5
Market price per share (INR) (EPS × P/E ratio) 20 5
Equity shares (No.) 10,00,000 10,00,000
Total market value (MPS × No. of Eq. Shared) 2,00,00,000 50,00,000

(ii) Post-merger effect on RIL

Particulars INR
Post-Merger earnings 30,00,000
Equity shares 12,50,000
 1
 10 , 00 , 000  10 , 00 , 000  
 4

As exchange ratio is 1: 4
EPS: 2.4
P/E ratio 10.00
Market price per share (EPS × P/E ratio) i.e., 10 × 2.4 24
Total Market Value (MPS × No. of Eq. Shares) i.e., (12,50,000 × 24) 3,00,00,000

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 Valuation in Mergers and Acquisitions

Gains from Merger

Particulars INR
Post-Merger Market value of the firm 3,00,00,000
Less: Pre-Merger market value
RIL 2,00,00,000
SIL 50,00,000 INR 2,50,00,000
INR 50,00,000

Apportionment of Gains between shareholders

Particulars RIL SIL
Post-merger market value
10,00,000 × 24 2,40,00,000
2,50,000 × 24 60,00,000
Less : Pre merged market value 2,00,00,000 50,00,000
40,00,000 10,00,000

Thus, the shareholders of both the Co. have gained from merger
(iii) Post-Merger Earnings
Increase in earnings by 20%
New earnings: ₹ 30,00,000 × 120% = 36,00,000
No. of equity share = 12,50,000
EPS = ₹ 36,00,000 ÷ 12,50,000 = ₹ 2.88
P/E ratio = 10
Market price per share = ₹ 2.88 × 10 = ₹ 28.80
Hence, shareholders will be better off than before the merger situation.

20 
The Shareholders of Aditya Co. have voted in favour of a buyout offer from Subhajit Co.
Information about each firm is given here below. Moreover, Aditya Co.’s shareholders will
receive one share of Subhajit Co. Stock for every three shares they hold in Aditya Co.

Particulars Subhajit Co. Aditya Co.

Present earnings 6.75 lakhs 3.00 lakhs
EPS 3.97 5.00
Number of Share 1.70 lakhs 0.60 lakhs
P/E ratio 20 5

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(i) What will the EPS of Subhajit. Co. be after the merger? What will the PE ratio be if the NPV
of the acquisition is zero?
(ii) What must Subhajit Co. feel is the value of the synergy between these two firms?
Explain how your answer can be reconciled with the decision to go ahead with the takeover.

EPS, P/E, Synergy Value

Answer
(i) The EPS of the combined company will be the sum of the earnings of both companies
divided by the shares in the combined company. Since the stock offer is one share of the
acquiring firm for three shares of the target firm, new shares in the acquiring firm will
increase by one- third [ Exchange ratio = 1/3]. So, the new EPS will be:
EPS = (INR 300,000 + 675,000)/ [170,000 + (1/3) (60,000)] = ₹ 5.132.
The market price of Subhajit Co. will remain unchanged if it is a zero NPV acquisition. Using
the PE ratio, we find the current market price of Subhajit Co. stock, which is = P/E × EPS =
20 × (6.75 lakhs/ 1.70 lakhs) = ₹ 79.41
If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the
new PE will be:
P/E = ₹ 79.41 / ₹ 5.132 = 15.48
(ii) If the NPV of the acquisition is zero, it would mean that Subhajit Co. would pay just the
market value of Aditya Co. i.e.
Number of shares × market price of Aditya Co. i.e., = 60,000 × 25 [MPS = P/E × EPS = 5 × 5
= 25]. The market value received by Subhajit co. = ₹ 15,00,000.
The cost of the acquisition is the number of shares offered times the share price, so the cost
is: Cost = (1/3) (60,000) (INR 79.4118) = ₹ 15,88,236.
The difference is synergy i.e. (15,00,000 - 15,88,236) = ₹ 88,236.

21 
The following information is provided related to the acquiring Firm Mark Limited and the target
Firm Mask Limited:
Particulars Firm Mark Limited Firm Mask Limited
Earnings after tax (INR) 2,000 lakhs 400 lakhs
Number of Shares Outstanding 200 lakhs 100 lakhs
P/E ratio (times) 10 5

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 Valuation in Mergers and Acquisitions

Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition, assuming
P/E ratio of Mark Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.

Swap Ratio, EPS, MPS, MV, Gain/Loss to

Shareholders

Answer
Particulars Mark Ltd. Mask Ltd.
EPS 2,000 Lakhs/ 200 Lakhs = 10 400 Lakhs/ 100 Lakhs = 4
Market price 10 × 10 = 100 4 × 5 = 20

(i) The Swap ratio based current market price is

20 /100 = 0.2 or 1 share of Mark Ltd. For 5 shares of Mask Ltd.
No. of shares to be issued = 100 Lakhs × 0.2 = 20 Lakhs
2,000 lakhs + 4,000 lakhs
(ii) EPS after merger = = 10.91
200 lakhs + 20 lakhs
(iii) Expected market price after merger assuming P/E 10 times.
= 10.91 × 10 = 109.10
(iv) Market value of merged firm
= 109.10 market price × 220 Lakhs shares = 240.02 crores
(v) Gain from the merger
Post-merger market value of the merged firm 240.02 crores
Less: Pre-merger market value
Mark Ltd. 200 Lakhs × ₹100 = 200 crores
Mask Ltd. 100 Lakhs × ₹20 = 20 crores 220.00 crores
Gain from the merger 20.02 crores
Appropriation of gains from the merger among shareholders:

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22 
Mohit Co. Ltd. is studying the possible acquisition of Neeraj Co. Ltd., by way of merger. The
following data are available in respect of the companies:

Particulars Mohit Co. Ltd. Neeraj Co. Ltd.

Earnings after tax (₹) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (₹) 200 160

(i) If the merger goes through by exchange of equity and the exchange ratio is based on the
current market price, what is the new earning per share for Mohit Co. Ltd.?
(ii) Neeraj Co. Ltd. wants to be sure that the earnings available to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?

EPS, Exchange Ratio

Answer
(i) Calculation of new EPS of Mohit Co. Ltd.
No. of equity shares to be issued by Mohit Co. Ltd. to Neeraj Co. Ltd.
= 4,00,000 shares × ₹ 160/₹ 200 = 3,20,000 shares
Total no. of shares in Mohit Co. Ltd. after acquisition of Neeraj Co. Ltd.
= 16,00,000 + 3,20,000 = 19,20,000
Total earnings after tax [after acquisition]
= 80,00,000 + 24,00,000 = 1,04,00,000
1, 04 , 00 , 000
EPS = = 5.42
19 , 20 , 000 equity shares

(ii) Calculation of exchange ratio which would not diminish the EPS of Neeraj Co. Ltd.
after its merger with Mohit Co. Ltd.
Current EPS:
80 , 00 , 000
Mohit Co. Ltd. =
16 , 00 , 000 equity shares

Neeraj Co. Ltd. = ₹ 24 Lakhs / 4 Lakhs Equity Shares = ₹ 6

Exchange ratio = 6/5 = 1.20

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 Valuation in Mergers and Acquisitions

No. of new shares to be issued by Mohit Co. Ltd. to Neeraj Co. Ltd.
= 4,00,000 × 1.20 = 4,80,000 shares
Total number of shares of Mohit Co. Ltd. after acquisition
= 16,00,000 + 4,80,000 = 20,80,000 shares
EPS [after merger] = ₹ 104 Lakhs / 20 Lakhs 80 Thousand Equity Shares = ₹ 5
Total earnings in Mohit Co. Ltd. available to new shareholders of Neeraj Co. Ltd.
= 4,80,000 × ₹ 5 = 24,00,000
Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to
shareholders of ‘N’ Co. Ltd.

23 
Shivani Limited is considering a takeover of Agam Limited. The particulars of two companies
are given below:

Particulars Shivani Limited Agam Limited

Earnings after tax (₹) 10,00,000 5,00,000
Equity shares (numbers) 5,00,000 1,25,000
Earnings per share 2 4
Price earnings ratio (times) 10 5

Analyze the information to determine the following:

(i) the market value of each company before merger.
(ii) the market value of the post-merger effect on Shivani Limited, assuming that the manage-
ment of Shivani Limited estimates that the shareholders of Agam Limited will accept an
offer of one share of Shivani Limited for five shares of Agam Limited. Are the shareholders
of Shivani Limited better or worse off than they were before the merger?
(iii) the market price per share if due to synergic effects, the management of Shivani Limited
estimates that the earnings will increase by 20%.

MV - Pre and Post, with Synergy

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Answer
(i) Market value of companies before merger:
Particulars Shivani Limited Agam Limited
EPS (₹) 2 4
P/E Ratio 10 5
Market price per share (₹) 20 20
Number of equity shares 5,00,000 1,25,000
Total market value (₹) 1,00,00,000 25,00,000

(ii) Post merger effect on Shivani Limited:

Particulars
Post merger earnings (10 lakhs +5 lakhs) (₹) 15,00,000.00
Equity shares (exchange ratio 1:5) (5 lakhs + 1.25 lakhs/5) 5,25,000
EPS (₹) 2.86
P/E ratio 10
Market price per share (₹) (2.86x10) 28.57
Total market value (₹) 1,50,00,000

Gains from merger for Shivani Limited:

Particulars (₹)
Post merger market value of the firm 1,50,00,000
Less: Pre-merger market value
Shivani Limited (₹) 1,00,00,000
Agam Limited (₹) 25,00,000 1,25,00,000
Gains 25,00,000

Apportionment of gains between shareholders:

Shivani Agam
Particulars
Limited Limited
Post merger market value
5,00,000 × 28.57 1,42,85,714
25,000 × 28.57 7,14,286
Less: pre merged market value 1,00,00,000 25,00,000
Gains 42,85,714 (17,85,714)

Conclusion: Shareholders of Shivani Limited will be better off than before the merger
situation.

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 Valuation in Mergers and Acquisitions

(iii) Post merger earnings:

Increase in earnings by 20%
New earnings ₹ 15,00,000 × 120% = ₹ 18,00,000 Number of equity shares = 5,25,000
Earnings Per Share (EPS) = ₹18,00,000/5,25,000 = ₹3.429 P/E ratio = 10
Market price per share = ₹3.429 × 10 = ₹34.29

24 
X Ltd. is considering a takeover of Y Ltd. The particulars of the two companies are given below:
Particulars X Ltd. Y Ltd.
Earnings after Tax (EAT) (in ₹) 20,00,000 10,00,000
Equity Shares (Nos.) 10,00,000 10,00,000
EPS 2 1
P/E Ratio (times) 10 5

Required:
(i) Compute the market value of each company before merger.
(ii) Assuming that the management of X Ltd. estimates that the shareholders of Y Ltd. will
accept an offer of one share of X Ltd. for four shares of Y Ltd. If there are no synergic effects,
compute the market value of the Post-merger X Ltd. Are the shareholders of X Ltd. better
off than they were before the merger?
(iii) Due to synergic effects, the management of X Ltd. estimates that the earnings will increase
by 20%. Calculate the new Post-merger EPS and the Price per Share. Will the shareholders
be better-off or worse-off? [7]

MV before Merger, Post Merger with

Synergy

Answer
(i) Market Value of Companies before merger:
X Ltd. Y Ltd.
EPS (₹) 2 1
P/E Ratio 10 5
Market Price/Share (₹) 20 5
Equity Shares 10,00,000 10,00,000
Total Market Value 2,00,00,000 50,00,000

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 Valuation in Mergers and Acquisitions

(ii) Post-merger effect on X Ltd.

Post-merger earnings ₹ (20,00,000 + 10,00,000) ₹ 30,00,000

Equity Shares (10,00,000 + 10,00,000 × 1/4) 12,50,000
[As the exchange ratio is 1:4]
EPS: 30,00,000/12,50,000 ₹ 2.4
P/E Ratio 10.00
Market Value : 10 × ₹ 2.4 (P/Ex EPS) ₹ 24
Total Value (12,50,000 × ₹ 24) ₹ 3,00,00,000

Gains from Merger:

Post merger market value of the firm ₹ 3,00,00,000

Less: Pre-merger market value ₹ 2,50,00,000
X Ltd. 2,00,00,000
Y Ltd. 50,00,000
₹ 50,00,000

Apportionment of gains between Shareholders:

X Ltd. Y Ltd.
Post-merger market value ₹ 2,40,00,000 ₹ 60,00,000
10,00,000 × ₹ 24
2,50,000 × ₹ 24
Less: Pre-merger market value ₹ 2,00,00,000 ₹ 50,00,000
₹ 40,00,000 ₹ 10,00,000

Thus the shareholders of both the companies have gained from the merger.
(ii) Post-merger Earnings: Increase in earnings by 20%
New earnings: ₹ 30,00,000 × 120% = ₹ 36,00,000
No. of Equity Shares = 12,50,000
EPS = ₹ 36,00,000/12,50,000 = ₹ 2.88
P/E Ratio = 10

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 Valuation in Mergers and Acquisitions

25 
A Ltd. is considering the acquisition of B Ltd. with stock. Relevant financial information is given
below:

Particulars A Ltd. B Ltd.

Present earnings ₹ 7.5 lakhs ₹ 2.5 lakhs
Equity (No. of shares) 4.0 lakhs 2.0 lakhs
EPS ₹ 1.875 ₹ 1.25
P/E ratio 10 5

Answer the following questions:

(i) What is the market price of each company?
(ii) What is the market capitalization of each company?
(iii) If the P/E of A Ltd. changes to 7.5, what is the market price of A Ltd.?
(iv) Does market value of A Ltd. change?

MP, Market Capitalisation, P/E, MV

Answer
(i) A Ltd.’s Market Price = ₹18.75
B Ltd.’s Market Price = ₹ 6.25
(ii) A Ltd.’s Market cap = ₹75 Lakhs
B Ltd.’s market cap = ₹12.5 Lakhs
(iii) Market price of A Ltd.’s = ₹14.0625
(iv) Yes. The market value decreases. i.e., = ₹56.25 Lakhs.

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 Valuation in Mergers and Acquisitions

26 
The following information is provided relating to the acquiring company Xenos Ltd. and the
target company Yogita Ltd.
Particulars Xenos Ltd. Yogita Ltd.
No. of shares (F.V. ₹ 10 each) 10.00 lakhs 7.5 lakhs
Market capitalization 500.00 lakhs 750.00 lakhs
P/E ratio (times) 10 5
Reserve and surplus 300.00 lakhs 165.00 lakhs
Promoter’s holding (No. of shares) 4.75 lakhs 5.00 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
Earnings, Book value and Market price of share of each company:
(i) Calculate the swap ratio and also calculate Promoters holding percentage after acquisi-
tion.
(ii) What is the EPS of Xenos Ltd. after acquisition of Yogita Ltd?
(iii) What is the expected market price per share and market capitalization of Xenos Ltd. after
acquisition, assuming P/E ratio of firm Xenos Ltd. remains unchanged?
(iv) Calculate free float market capitalization of the merged firm.

Swap Ratio, EPS, MPS, Free Float Market

Capitalisation

Answer
Particulars Xenos Ltd. Yogita Ltd.
Market capitalization 500 lakhs 750 lakhs
No. of shares 10 lakhs 7.5 lakhs
Market price per share INR 50 INR 100
P / E Ratio 10 5
EPS (MPS ÷ P/E Ratio) INR 5 INR 20
Profit (No. of shares × EPS) INR 50 lakhs INR 150 lakhs
Share Capital INR 100 lakhs INR 75 lakhs
Reserve and surplus INR 300 lakhs INR 165 lakhs
Total (Share Capital + Reserve and Surplus) INR 400 lakhs INR 240 lakhs
Book value per share (Total ÷ No. of shares) INR 40 INR 32

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 Valuation in Mergers and Acquisitions

(i) Calculation of swap ratio

EPS 5: 20 i.e., 1: 4 i.e., 4 × 40% = 1.6
Book value 40: 30 i.e., 1: 0.8 i.e., 0.8 × 25% = 0.2
Market price 50: 100 i.e., 1: 2 i.e., 2 × 35% = 0.7
Total = 2.5
Swap ratio is for every one share of Yogita Ltd. to issue 2.5 shares of Xenos Ltd. Hence total
no. of shares to be issued =
7.5 lakhs × 2.5 = 18.75 lakh shares.
Promoters holding = 4.75 lakh shares + (5 × 2.5) lakh shares = 17.25 lakh shares
17.25
So, parameters holding percentage = × 100 = 60%
28.75
Total no. of shares = 10 lakhs + 18.75 lakhs = 28.75 lakhs
Total Profit 50 Lakhs + 150 lakhs
(ii) EPS = = = ₹ 6.956
No. of shares 28.75 Lakhs
(iii) Expected market price = EPS × P/E = 6.956 × 10 = ₹ 69.56 Market capitalization
= ₹ 69.56 × 28.75 lakh shares = ₹ 1,999.85 lakh
(iv) Free float of market capitalization = ₹ 69.56 × (28.75 × 40%) = ₹ 799.94 lakh

27 
Vikas Ltd. wishes to acquire Nikas Ltd., a small company with good growth prospects. The
relevant information for both companies is as follows:

Company Equity shares Outstanding Share price (₹) EAT (₹) EPS (₹)
Vikas Ltd 10,00,000 25 20,00,000 2
Nikas Ltd 1,00,000 10 2,00,000 2

Vikas Ltd. is considering three different acquisition plans viz.,

(i) Pay ₹ 12.5 per share for each share of Nikas Ltd.
(ii) Exchange ₹ 25 cash and one share of Vikas Ltd for every four shares of Nikas Ltd.
(iii) Exchange one share for every two shares of Nikas Ltd.
Required :
(a) What will Vikas’s Earning per share (EPS) be under each of the three plans?
(b) What will share prices of Vikas Ltd. be under each of the three plans, if its current price
earnings ratio remains unchanged?

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 Valuation in Mergers and Acquisitions

(c) Formulate a strategy for Vikas Ltd to take over Nikas Ltd so that post merger Vikas Ltd gets
the best market valuation.

EPS, MPS and Strategy under 3 plans

Answer
EPS and Market price per share (MPS) under 3 different acquisition plans

Plan 1 Plan 2 Plan 3

EPS 2.2 2.146 2.095
Market Price per share 27.5 26.83 26.19

The strategy should to persuade shareholders of Nikas Ltd to accept Plan 1 that is Vikas Ltd to
pay ₹12.50 per share for each share of Nikas Ltd. This Plan 1 should be followed because it gives
the highest market price of share post merger, from the point of view of Vikas Ltd.
The points for persuasion of shareholders of Nikas Ltd are:
(a) Plan 1 provides highest cash payout of ₹12.50 per share of Nikas Ltd (Plan 2 is ₹6.25 per
share and Plan 3 is nil)
(b) Shareholders of Nikas Ltd are free to invest their monies in their own ventures and will not
have to be minority shareholders in another company.
(c) From perspective of Vikas Ltd too it gets full control of the merged company, hence Plan 1
is better for both parties.

28 
Pure Drugs Limited is in the Pharmaceutical Industry and has a business strategy of growing
inorganically. It is contemplating to acquire Solid Drugs Limited which has a strong hold in
cardiac segment. Pure Drugs Limited has 30 crore shares outstanding which are trading on
an average price of ₹ 300 while Solid Drugs Limited has outstanding shares 20 crore and are
selling at an average price of ₹ 200 per share. The EPS are of ₹ 12 and ₹ 6 for Pure Drugs Limited
and Solid Drugs Limited respectively. Recently, the management of both the companies had a
meeting wherein number of alternative proposals was considered for exchange of shares. They
are –
(i) Exchange Ratio should be in proportion to the relative EPS of two companies.
(ii) Exchange Ratio should be in proportion to the relative share prices of two companies.
(iii) Exchange Ratio should be 3 shares of Pure Drugs Limited for every 5 shares of Solid Drugs

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 Valuation in Mergers and Acquisitions

Limited.
You are required to calculate EPS and Market Price under the three options, assuming the P/E
of Pure Drugs Limited after merger will remain unchanged. Assume that there will not be any
synergy gains due the said merger.

EPS and MPS under 3 plans

Answer
Pure Drugs Solid Drugs
Limited Limited
EPS (₹) 12 6
No. of Outstanding Shares (in crores) 30 20
Net Profit (in ₹ crores) 360 120
Net Profit (in ₹ crores) after Acquisition 480
Price of Share 300 200
P/E Ratio 25.00 33.33

Alternative- III
Alternative- I Alternative- II
(Basis-3 shares
(Basis- EPS) (Basis- Prices)
for 5 shares)
Exchange Ratio (No. of Shares of Pure 0.50 0.67 0.60
Drugs Limited for each share of Solid Drugs
Limited)
New Shares to be issued (in Crores) 10 13.40 12
Total No. of Shares after Acquisition (in 40 43.40 42
crores) (30 + 10) (30 + 13.40) (30 + 12)
EPS (in ₹) after Acquisition Given ₹ 480 12.00 11.06 11.43
crores of Profit Acquisition
Given the P/E Ratio of 25, the Share Price of 300.00 276.50 285.71
Pure Drugs Limited will be - (in ₹)

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 Valuation in Mergers and Acquisitions

29 
Following are the financial statement for Adarsha Ltd. and Biswanath Ltd. for the current
financial year. Both the firm operate in the same industry:
Balance Sheet
Adarsha Biswanath
Particulars
Ltd Ltd
Total Current assets 14,00,000 10,00,000
Total Fixed assets (net) 10,00,000 5,00,000
24,00,000 15,00,000
Equity capital (of ₹ 100 each) 10,00,000 8,00,000
Retained earnings 2,00,000
14% Long-term debt 5,00,000 3,00,000
Total Current liabilities 7,00,000 4,00,000
24,00,000 15,00,000

Income-Statements
Adarsha Biswanath
Particulars
Ltd Ltd
Net sales 34,50,000 17,00,000
Cost of goods sold 27,60,000 13,60,000
Gross profit 6,90,000 3,40,000
Operating expenses 2,00,000 1,00,000
Interest 70,000 42,000
Earnings before taxes 4,20,000 1,98,000
Taxes (50%) 2,10,000 99,000
Earnings after taxes (EAT) 2,10,000 99,000

Additional Information

Number of equity shares 10,000 8,000

Dividend payment ratio (D/P) 40% 60%
Market price per share (MPS) ₹ 400 ₹ 150

Assume that the two firms 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 prices 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 (BVPS) components.

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 Valuation in Mergers and Acquisitions

(ii) Estimate future EPS growth rates for each firm.

(iii) Based on expected operating synergies, Adarsha Ltd. estimates that the intrinsic value of
Biswanath’s equity share would be ₹ 200 per share on its acquisition. You are required to
develop a range of justifiable equity share exchange ratios that can be offered by Adarsha
Ltd. to Biswanath Ltd. ‘s shareholders. Based on your analysis in parts (i) and (ii) would you
expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits?
Why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4:1 being offered by
Adarsha Ltd. 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 Adarsha’s pre-merger P/E ratio will
continue after the merger, estimates the post-merger market price. Show the resulting
accretion or dilution in pre-merger market prices.
Worker price per share (MPS) = EPS × P/E ratio or P/E Ratio = MPS / EPS.

EPS, P/E, BV/Share, Growth Rate, Range of

Exchange Ratio, Post Merger EPS & MPS,
Accreation / Dilution

Answer
(i) Determination of EPS, P/E ratio, ROE and BVPC of Adarsha Ltd. and Biswanath Ltd.
Particulars Adarsha Ltd. Biswanath Ltd.
Profits after tax (PAT) INR 2,10,000 INR 99,000
No. of Shares (N) 10,000 8,000
EPS (PAT/N) INR 21.00 INR 12.375
Market price share (MPS) INR 400 INR 150
P/E ratio (MPS/EPS) 19.05 12.12
Equity funds (EF) 12,00,000 8,00,000
BVPS (EF/N) INR 120 INR 100
ROE (PAT/EF) ×100 17.5% 12.375%

(ii) Estimates of Growth rates in EPS for each Firm

Retention ratio (1-D/P ratio) 0.6 0.4
Growth rate (ROE × Retention ratio) 10.5% 4.95%
(iii) Justifiable equity share exchange ratio
MPSB INR 150
(a) Market Price based = = 0.375:1 (lower limit)
MPSA INR 400

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 Valuation in Mergers and Acquisitions

INR 200
(b) Intrinsic value based = = 0.5:1 (upper limit)
INR 400

Since Adarsha Ltd. has a higher EPS, ROE, P/E ratio, and even higher EPS growth expectations,
the negotiated terms would be expected to be closer to the lower limit, based on the
existing share prices.
(iv) Calculation of Post-merger EPS and other effects
Adarsha Biswanath
Particulars Combined
Ltd Ltd.
PAT (i) (INR ) 2,10,000 99,000 3,09,000
Shares outstanding (ii) 10,000 8,000 13,200*
EPS (i)/(ii) (INR ) 21.00 12.375 23.41
EPS Accretion (Dilution) (INR ) 2.41 3.015** --

Note:
* Shares outstanding (combined) = 10,000 shares + (0.40 × 8,000) = 13,200 Shares
** EPS claim per old share = ₹ 23.41 × 0.40 = ₹ 9.36
EPS dilution of B Ltd. = ₹ 12.375 – ₹ 9.36 = ₹ 3.015
(v) Estimate of Post-merger Market Price and other effects
Biswanath
Particulars Adarsha Ltd Combined
Ltd
EPS (i) (INR ) 21.00 12.375 23.41
P/E Ratio (ii) 19.05 12.12 19.05
MPS (i) × (ii) (INR ) 400 150 446.00
MPS Accretion (Dilution) (INR ) 46 28.40*** --
Note: ***
MPS claim per old share (INR 446 × 0.4) 178.40
Less : MPS per old share 150.00
MPS accretion of B Ltd. 28.40

CMA Final
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 Valuation in Mergers and Acquisitions

30 
Following are the financials of Summer Ltd. and Monsoon Ltd. for the current financial year.
Both the firms operate in the same industry:
Balance Sheet as on 31st March 20X2

Particulars Summer Ltd. Monsoon Ltd.

Total Current Assets 14,00,000 14,00,000
Total Fixed Assets 24,00,000 10,00,000
Total Assets 38,00,000 24,00,000
Equity Capital (of INR 10 each) 14,00,000 12,00,000
Retained earnings 2,00,000
14% Long-term debt 10,00,000 7,00,000
Total Current Liabilities 12,00,000 5,00,000
Total Liabilities 38,00,000 24,00,000

Income Statement for the year ended 31st March 20X2

Particulars Summer Ltd. Monsoon Ltd.

Net sales 44,50,000 27,00,000
Cost of goods sold 37,60,000 24,00,000
Gross Profit 6,90,000 3,00,000
Operating expenses 2,00,000 1,00,000
Interest 50,000 50,000
Earnings before taxes 4,40,000 1,50,000
Taxes (40%) 2,64,000 90,000
Earnings after taxes (EAT) 1,76,000 60,000

Additional Information:

Number of equity shares 8,000 7,000

Dividend pay-out ratio (D/P) 40% 60%
Market price per share (MPS) 300 100

Assume that the two firms 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 prices 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 (BVPS) components.
(ii) Estimate future EPS growth rates for each firm.

368 | CMA Final

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(iii) Based on expected operating synergies, Summer Ltd. estimates that the intrinsic value
of Monsoon Ltd.’s equity share would be INR 200 per share on its acquisition. You are
required to develop a range of justifiable equity share exchange ratios that can be offered
by Summer Ltd. to Monsoon Ltd.'s shareholders. Based on your analysis in parts (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
Summer Ltd. 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 Summer Ltd.’s pre-merger P/E ratio
will continue after the merger, estimate the post-merger market price. Show the resulting
accretion or dilution in pre-merger market prices.

EPS, P/E, BV/Share, Growth Rate, Range of

Exchange Ratio, Post Merger EPS & MPS,
Accreation/Dilution

Answer
(i) Determination of EPS, P/E ratio, ROE and BVPS of Summer Ltd. and Monsoon Ltd.
Particulars Summer Ltd. Monsoon Ltd.
Profit after tax 1,76,000 60,000
No. of shares 5,000 4,000
EPS (PAT/No. of shares) 35 15
Market Price per share (MPS) 300 100
P/E ratio (MPS/EPS) 9 7
Equity Funds 16,00,000 12,00,000
Book Value per share (Equity funds/ No. of shares) 320 300
Return on Equity (PAT/Equity Funds) × 100 11% 5%

(ii) Determination of Growth rates in EPS for each firm

Particulars Summer Ltd. Monsoon Ltd.
Retention Ratio (1- dividend pay-out ratio) 60% 40%
Growth rate (ROE X Retention Ratio) 6.6% 2%

(iii) Determination of justifiable equity share exchange ratio

(a) Market Price based MPSM/ MPSS = INR 100/INR 300 0.33:1 (Lower limit)
(b) Intrinsic Value based =INR 200/ INR 300 0.67:1 (Upper limit)

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 Valuation in Mergers and Acquisitions

Since Summer Ltd. has higher EPS, ROE, P/E ratio, and even a higher EPS growth expectation,
the negotiated terms would be expected to be closer to the lower limit based on the
existing share prices.
(iv) Calculation of Post-merger EPS and other effects
Particulars Summer Ltd Monsoon Ltd. Combined
PAT (i) (INR) 1,76,000 60,000 2,36,000
Shares Outstanding (ii) 5,000 4,000 6,600 *
EPS (i)/(ii) (INR) 35 15 36
EPS Accretion (Dilution) (INR) 1 0.70 * -

Note :
Shares outstanding (combined) 5,000 + (4,000*0.40) 6,600
EPS claimed per old share 36*0.40% 14.30
EPS dilution of Monsoon Ltd. 15 – 14.3 0.70

(v) Estimation of Post- merger Market Price and other effects

Particulars Summer ltd. Monsoon Ltd combined
EPS (i) INR 35 15 36
P/E Ratio (ii) 8.52 6.67 8.52
MPS (i) × (ii) 300 100 305
MPS Accretion (Dilution) (INR) 5 21.90 *

Note:
MPS claim per old share 305*0.4 121.90
Less: MPS per old share 100
MPS accretion of Monsoon ltd. 21.90

31 
Ratnakar Ltd. agrees to buy over the business of JSB Ltd. effective 1st April, 2022. The summa-
rized Balance Sheet of Ratnakar Ltd. as on 31st March 2022 are as follows:
Balance Sheet as at 31st March, 2022 (In crores)
Liabilities Ratnakar (₹) JSB (₹)
Paid up Share Capital
Equity Shares of ₹100 each 350 ..
Equity Shares of ₹10 each .. 6.5
Reserve & Surplus 950 25
Total 1,300 31.5

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 Valuation in Mergers and Acquisitions

Assets
Net Fixed assets 220 0.5
Net Current assets 1,020 29
Deferred current asset 60 2
Total 1,300 31.5

Ratnakar Ltd proposes to buy out JSB Ltd. and the following information is provided to you as a
part of the scheme of buying:
(1) The weighted average post tax maintainable profits of Ratnakar Ltd and JSB Ltd. for the last
4 years are INR 300 crores and ₹10 crores respectively.
(2) Both the companies envisage a capitalization rate of 8%.
(3) Ratnakar Ltd. has a contingent liability of ₹300 crores as on 31st March, 20 × 1.
(4) Ratnakar Ltd to issue shares of ₹100 each to the shareholders of JSB Ltd. in terms of the
exchange ratio as arrived on the share value basis. (Please Consider weights of 1 & 3 for the
value of shares arrived on Net Asset basis and Equity Capitalization method respectively
for Ratnakar Ltd & JSB Ltd.
You are Required to arrive at the value of the shares of both Ratnakar Ltd and JSB Ltd. under:
(a) Net Asset Value method
(b) Earnings Capitalization Method
(c) Exchange ratio of shares of Ratnakar Ltd to be issued to the shareholders of JSB Ltd on a
Fair value basis (taking into consideration the assumptions mentioned in point 4 above)

Valuation of Shares - Net Assets, Earning

Capitalisation, Exchange Ratio

Answer
(a) Net Asset Value
1, 300 − 300
Ratnakar Ltd (₹ in Crores) = 285.71
3.5
31.5
JSB Ltd (₹ in Crores) = 48.46
0.65
(b) Earning Capitalization Value
350 / 8
Ratnakar Ltd (₹ in Crores) = 1,071.43
3.5

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 Valuation in Mergers and Acquisitions

10 / 0.08
JSB Ltd (₹ in Crores) = 192.31
0.65
(c) Fair Value
285.71 1  1, 071.43  3
Ratnakar Ltd (₹ in Crores) = 875
4
48.46  1  192.31 3
JSB Ltd (₹ in Crores) = 156.3475
4
Exchange Ratio 156.3475/875 = 0.1787
Ratnakar Ltd should issue 0.1787 share for each share of JSB Ltd.
Note: In above solution it has been assumed that the contingent Liability will materialize
at its full amount.

32 
Royal Pvt Ltd and Aero Pvt Ltd are proposed to be merged with Vincent Pvt Ltd whereby
Vincent P Ltd will issue its own shares to the shareholders of the two target companies. The
recent summarized financial statements of all the three companies are shared below.
Vincent P Ltd

Profit & Loss Statement 31-Mar-20 31-Mar-21

Total Revenue from Operations 1,17,41,057 2,89,59,987
Operating Expenses 42,35,529 1,93,81,027
Profit/(Loss) before Tax 75,05,528 95,78,960
Total Tax 18,76,382 23,94,740
Profit After Tax 56,29,146 71,84,220

Balance Sheet 31-Mar-20 31-Mar-21

Equity & Liabilities
Equity
Equity Share Capital (Face Value ₹ 1) 41,49,800 41,49,800
Other Equity 4,37,82,501 5,09,66,721
Total Equity 4,79,32,301 5,51,16,521
Liabilities
Non Current Liabilities 0 0
Total Current Liabilities 2,60,512 1,94,212
Total Equity & Liabilities 4,81,92,813 5,53,10,733

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 Valuation in Mergers and Acquisitions

Assets
Property, Plant & Equipment 20,51,077 20,51,577
Investments 3,24,90,500 1,76,37,500
Non Current Assets 3,45,41,577 1,96,89,077
Current Assets
Inventories 1,00,00,500 1,50,00,000
Cash & Cash Equivalents 34,93,620 2,04,49,657
Other Current Assets 1,57,116 1,71,999
Total Current Assets 1,36,51,236 3,56,21,656
Total Assets 4,81,92,813 5,53,10,733

Additional information:
The Property, Plant & Equipment includes Land and is carried at Fair Value. The fair value of
investments is ₹ 2,17,46,000. The future cash flow projections are not available but the
weighted average profits of the last 2 years can be considered maintainable. The capitalization
rate applicable to the company is 15 percent. Comparable companies trade in the market at
2.28x Price to Book Value multiple. However, a marketability discount may be considered. All
the three approaches may carry equal weight.
Royal P Ltd

Profit & Loss Statement 31-Mar-20 31-Mar-21

Total Revenue from Operations 11,00,000 11,10,407
Operating Expenses 4,85,119 4,88,316
Profit/(Loss) before Tax 6,14,881 6,22,091
Total Tax 4,256 5,560
Profit After Tax 6,10,625 6,16,531

Balance Sheet 31-Mar-20 31-Mar-21

Equity & Liabilities
Equity
Equity Share Capital (Face Value ₹ 1) 1,40,000 1,40,000
Other Equity 20,59,643 26,76,174
Total Equity 21,99,643 28,16,174
Liabilities
Non-Current Liabilities 0 0
Total Current Liabilities 36,506 18,666
Total Equity & Liabilities 22,36,149 28,34,840

CMA Final
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 Valuation in Mergers and Acquisitions

Assets
Tangible Property 20,50,000 20,50,000
Non Current Assets
Current Assets
Cash & Cash Equivalents 1,63,308 7,74,449
Other Current Assets 22,841 10,391
Total Current Assets 1,86,149 7,84,840
Total Assets 22,36,149 28,34,840

The Fair Value of Tangible Property is ₹ 80,59,000. The future cash flow projections are not
available and the past profits is not representative of future performance. Given the size of the
company, it may not be comparable to large listed companies in the market.
Aero P Ltd

Profit & Loss Statement 31-Mar-20 31-Mar-21

Total Revenue from Operations 1,00,000 1,08,245
Operating Expenses 83,541 86,370
Profit/(Loss) before Tax 16,459 21,875
Total Tax 4,142 5,507
Profit After Tax 12,317 16,368

BALANCE SHEET 31-Mar-20 31-Mar-21

Equity & Liabilities
Equity
Equity Share Capital (Face Value ₹ 1) 1,40,000 1,40,000
Other Equity 20,62,126 20,78,494
Total Equity 22,02,126 22,18,494
Liabilities
Non-Current Liabilities
Total Current Liabilities 36,083 18,499
Total Equity & Liabilities 22,38,209 22,36,993
Assets
Tangible Property 20,50,000 20,50,000
Non Current Assets 20,50,000 20,50,000
Current Assets
Cash & Cash Equivalents 1,65,475 1,76,683
Other Current Assets 22,734 10,310
Total Current Assets 1,88,209 1,86,993
Total Assets 22,38,209 22,36,993

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 Valuation in Mergers and Acquisitions

Additional information:
Investments include 5,00,000 shares of Vincent P Ltd. The cash flow projections are not
available and past profits are not representative of future profits. Also, Market Approach will
not be relevant for valuation.
You are required to value the three companies using applicable approaches and arrive at the
Share Exchange Ratio. Also, calculate the number of shares to be issued by Vincent to each
company shareholders.

Valuation of Companies & Exchange Ratio Cost, Market and Income

Approach

Answer
Valuation of Vincent P Ltd
Valuation under Cost Approach

Book Value of Assets 5,53,10,733

Less: Book Value of Liabilities 1,94,212
Book Value of Equity 5,51,16,521
Less: Book Value of Investments 1,76,37,500
Add: Fair Value of Investments 2,17,46,000
Adjusted Book Value of Equity 5,92,25,021
Number of Shares 41,49,800
Adjusted Book Value of Equity (Per Share) 14.27

Valuation under Market Approach

Valuation Multiple 2.2800

Book Value of the Company 5,51,16,521
Value of Company 12,56,65,667
Less: Discount for Lack of Marketability 2,51,33,133
Value of Equity (P/BV Multiple) 10,05,32,534
Value per share 24.23

Valuation under Income Approach

Profit 2021 Weight 2 71,84,220

Profit 2020 Weight 1 56,29,146

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 Valuation in Mergers and Acquisitions

Average Maintainable Profit (weighted average) 66,65,862

Capitalisation Rate 15%
Value of Equity (PECV Approach) 4,44,39,079

Calculation of Value per share

Fair Value per

Particulars Weights Fair Value
share
Cost Approach (Adjusted Net Asset Value) 1/3 5,92,25,021 14.27
Income Approach (PECV Method) 1/3 4,44,39,079 24.23
Market Approach (P/BV Ratio) 1/3 10,05,32,534 10.71
Value of Equity (Weighted average) 100% 6,80,58,738 16.40

Valuation of Royal P Ltd

Valuation under Cost Approach

Calculation of adjusted Net Asset Value Royal P Ltd

Book Value of Assets 28,34,840
Book Value of Liabilities 18,666
Book Value of Equity 28,16,174
Less: Book Value of Investments 20,50,000
Add: Fair Value of Investments 80,59,000
Adjusted Book Value of Equity 88,25,174
Number of Shares 1,40,000
Adjusted Book Value of Equity (Per Share) 63.04

The Market Approach and Income Approach cannot be applied based on available information.
Valuation of Aero P Ltd

Calculation of adjusted Net Asset Value Royal P Ltd

Book Value of Assets 22,36,993
Book Value of Liabilities 18,499
Book Value of Equity 22,18,494
Less: Book Value of Investments 20,50,000
Add: Fair Value of Investments (Note 1) 82,00,243
Adjusted Book Value of Equity 83,68,737
Number of Shares 1,40,000
Adjusted Book Value of Equity (Per Share) 59,78

Note 1: Since Aero holds 5,00,000 shares of Vincent Ltd and wehave already calculated Vincent
Ltd valuation above, the Fair Value of investment would be 16.40 × 5,00,000 = 82,00,243

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 Valuation in Mergers and Acquisitions

Calculation of Share Exchange Ratio

Particulars Vincent Royal Aero

Valuer per share 16.40 63.04 59.78
Share Exchange Ratio with Transferee 10.00 38.44 36.45
10: 38 10: 36

Number of shares to be issued to shareholders of Royal:

Existing shares of Royal 140,000
Share exchange Ratio 10 : 38
Number of shares to be issued: 140,000 × 38 / 10 = 5,32,000
Number of shares to be issued to shareholders of Aero:
Existing shares of Royal 140,000
Share exchange Ratio 10 : 36

Number of shares to be issued: 140,000 × 36 / 10 504,000

Less: Shares already held by Aero
(since Aero will be merged and Vincent cannot its own 500,000
shares, there will not be anyone to hold the shares and thus
these shares will be cancelled)
Net Shares to be issued 4,000

33 
Waree Ltd. wants to acquire Minda Ltd.,
The balance sheet of Minda Ltd. as on 31.03.20x2 is as follows:
Liabilities Amount Assets Amount
(1) Shareholders Fund: (1) Non-current Assets:
(a) Share Capital (a) Fixed Assets
60,000 Equity Shares of ₹ 10 each 6,00,000 (i) Tangible Assets: 11,00,000
Retained Earnings 2,00,000 (2) Current Assets:
(2) Non-Current Liabilities: (a) Inventories 1,70,000
Long Term Borrowings - 12% 2,00,000 (b) Trade Receivables 30,000
Deben- ture
(3) Current Liabilities:
Trade Payables - Sundry Creditors 3,20,000 (c) Cash and Cash Equivalents 20,000
Total 13,20,000 Total 13,20,000

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 Valuation in Mergers and Acquisitions

Additional Information:
(i) Shareholders of Minda Ltd. will get one share in Waree Ltd. for every two shares.
(ii) External liabilities are expected to be settled at ₹ 3,00,000.
(iii) Shares of Waree Ltd. would be issued at its current price of ₹ 15 per share.
(iv) Debenture holders will get 13% convertible debentures in the purchasing companies for
the same amount.
(v) Debtors and inventories are expected to release ₹ 1,80,000.
(vi) Waree Ltd. has decided to operate the business of Minda Ltd. as a separate division. The
division is likely to give cash flow (after tax) to the extent of ₹ 3,00,000 per year for 6 years.
Waree Ltd. has planned that after 6 year this division would be damaged and disposed off
for ₹ 1,00,000.
(vii) Company’s cost of capital is 14%
Make a report to the managing director advising him about the financial feasibility of the
acquisition.
Note: Present value of ₹ 1 for six years @ 14% interest : 0.8772, 0.7695, 0.6750, 0.5921 and
0.4556.

Report for Financial Feasibility

Answer
Cost of Acquisition INR

 60 , 000 
Equity share   15  4,50,000
 2 
13% convertible debenture 2,00,000
Cash (Payment for external liabilities – Realisation of Cash from Debtors and 1,00,000
inventories – Cash of Minda Ltd.) i.e., (3,00,000 – 1,80,000 – 20,000)
Total Consideration 7,50,000

Calculation of NPV

Year Cash inflow PV factor @ 14% Prevent value

1 3,00,000 0.8772 2,63,160
2 3,00,000 0.7695 2,30,850
3 3,00,000 0.6750 2,02,500

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4 3,00,000 0.5921 1,77,630

5 3,00,000 0.4556 1,55,820
6 3,00,000 + 1,00,000 1,82,240
Total PV of cash inflow 12,12,200
Less: Cost of acquisition 7,50,000
NPV 4,62,200

Since the NPV is positive it is suggested to acquire Minda Ltd. to maximize the value of
shareholders of both the companies.

34 
The following information is relating to Fortune India Ltd. having two division Pharma division
and FMCG division. Paid up share capital of Fortune India Ltd. is consisting of 3,000 lakhs equity
shares of ₹ 1 each. Fortune India Ltd. decided to de-merge Pharma Division as Fortune Pharma
Ltd. w.e.f. 1.4.20x6. Details of Fortune India Ltd. as on 31.3.20x6 and of Fortune Pharma Ltd. as
on 1.4.20x6 are given below:
Fortune Pharma Ltd. Fortune India Ltd.
Particulars
(INR in Lakhs) (INR in Lakhs)
Outside Liabilities
Secured Loans 400 3,000
Unsecured Loan 2,400 800
Current Liabilities & Provision 1,300 21,200
Assets
Fixed Assets 7,740 20,400
Investments 7,600 12,300
Current Assets 8,800 30,200
Loan & Advances 900 7,300
Deferred tax / Misc. exp. 60 (200)

Board of directors of the company have decided to issue necessary equity shares of Fortune
Pharma Ltd. of ₹ 1 each, without any consideration to the shareholders of Fortune India Ltd. For
that purpose, following points are to be considered:
Transfer of Liabilities and Assets at Book value.
Estimated profit for the year 20x6-x7 is ₹ 11,400 lakh for Fortune India Ltd. and ₹ 1,470 lakh for
Fortune Pharma Ltd.
Estimated Market price of Fortune Pharma Ltd. is ₹ 24.50 per share.
Average P/E ratio of FMCG sector is 42 and Pharma sector is 25, which is to be expected for
both the companies.

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 Valuation in Mergers and Acquisitions

Calculate:
(i) The Ratio in which shares of Fortune Pharma are to be issued to the shareholders of Fortune
India Ltd.
(ii) Expected Market price of Fortune India Ltd.
(iii) Book value per share of both the Co’s after demerger.

Demerger

Answer
Shareholder’s fund

Fortune India Ltd. Fortune Pharma Ltd. Fortune India (FMCG) Ltd
Assets 70,000 25,100 44,900
Outside Liabilities 25,000 4,100 20,900
Net Worth 45,000 21,000 24,000

(i) Calculation of shares of Fortune Pharma Ltd. to be issued to shareholders of Fortune

India Ltd.
Fortune Pharma Ltd.
Estimated Profit (INR Lakhs) 1,470
Estimated market price (INR) 24.5
Estimated P/E 25
Estimated EPS (INR) (24.50 25) 0.98
No. of shares (Lakhs) (1,470 0.98) 1,500

Hence, Ratio is 1 shares of Fortune Pharma Ltd. for 2 shares of Fortune India Ltd.
(ii) Expected market price of Fortune India Ltd.
Fortune India (FMCG) Ltd
Estimated Profit (INR in Lakhs) 1,470
no. of equity shares (in Lakhs) 3,000
Estimated EPS (INR) 3.8
Estimated P/E 42
Estimated market price (INR) 159.6

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(iii) Book value per share Fortune Pharma Ltd.

Fortune Pharma Ltd. Fortune India (FMCG) Ltd.
Net worth (INR in Lakhs) 21,000 24,000
No of Shares (INR in Lakhs) 1,500 3,000
Book value of shares (INR) 14 8

35 
Hypothetical Ltd. is acquiring all the outstanding equity shares of Target Ltd. by exchanging
one share of its own equity shares for each share of Target Ltd. Hypothetical Ltd. has a policy of
keeping 50% of its capital structure in debts. The Capital structure of both these firms before
the merger is as follows:

Hypothetical Ltd. Target Ltd.

(Amount in Lakhs of rupees)
Equity capital (of ₹ 100 each) 20 5
Retained earnings 25 25
14% Preference Shares 5 —
13% Debts 50 —

Hypothetical company needs your advice on the following questions:

(i) What will the capital structure of the merged firm be? Determine the percentage share of
debt in the merged firm.
(ii) Has the merged firm’s financial risk declined?
(iii) How much additional debt can the combined firm borrow to return to a capital structure
50% of which is debt?

Merged Co. - Capital Structure, Financial

Risk, Additonal Debt

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 Valuation in Mergers and Acquisitions

Answer
(i) Capital structure of merged firm – (In Rupees)

Equity capital 25,00,000

Retained Earnings 50,00,000
14% Preference shares 5,00,000
13% Debts 50,00,000
1,30,00,000

Debt / total capital = 38.46%

(ii) Yes, the financial risk has declined due to the lower debt ratio of the merged firm. The same
was 50% in a pre-merger situation.
(iii) Additional Debts = ₹ 30,00,000

36 
XY Ltd., a retail florist, is for sale at an asking price of ₹ 62,00,000. You have been contacted
for a potential buyer who has asked you to give him opinion as to whether the asking price
is reasonable. The potential buyer has only limited information about XY Ltd. And potential
buyer does not know that annual gross sales of XY Ltd. is about ₹ 82,00,000 and that last year’s
tax return reported an annual profit of ₹ 8,40,000 before tax. You have collected the following
information from the financial details of several retail florists that were up for sale in the past:
Table 1

Particulars Price-to-sale(P/S) ratio Price-to-earnings(P/E) ratio

Number of firms 38.0 33.0
Mean ratio 0.55 3.29
Coefficient of Variation 0.65 1.52
Maximum ratio 2.35 6.29

Table 2 Top 10 players (in descending P/S order)

Firm 1 2 3 4 5 6 7 8 9 10
(P/S) ratio 2.35 1.76 1.32 1.17 1.09 1.01 0.96 0.85 0.72 0.68
(P/E) Multiple 5.65 6.29 5.31 4.60 3.95 3.25 3.10 2.96 2.90 2.75

Offer your opinion on the reasonableness of the asking price.

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Evaluation of Ask Price – Price Multiple Co-efficient of Variation

Based

Answer
Average P/S ratio of Industry = 0.55 Coefficient of variation of P/S ratio = 0.65 Average P/E ratio
of Industry = 3.29 Coefficient of variation of P/E ratio = 1.52
The coefficient of variation of P/S ratio is much lower than the coefficient of variation of P/E
ratio. From this we can infer that there is a wider dispersion in case of P/E ratio than in case of
P/S ratio. Therefore, while defining the market, it is preferable to take P/S as guiding factor.
Asking price of XY Ltd. INR 62,00,000
Annual sales of XY Ltd. INR 82,00,000
Asking P/S ratio of XY Ltd. = 62,00,000/82,00,000 = 0.76
P/S ratio of XY Ltd. 0.76 is much higher than industry average 0.55, it is far below than the
maximum P/S ratio of 2.35. The ratio of XY Ltd. is lying between 8th and 9th highest of the top
ten players of the industry. In other words, XY Ltd. would need to be among the 22%* (8.5/38 ×
100) most desirable florist business to justify the asking price of ₹ 62,00,000 with annual gross
sales of ₹ 82,00,000. If the sales are likely to hold in the coming years, the price may be (0.85 +
0.72)/2 × ₹ 82 Lakhs = ₹ 64.37 Lakhs.
Provided the buyer believes that XY Ltd. is a superior retail florist (among the top quartile), and
the future sales are not likely to fall, the asking price of ₹ 62 lakhs appears to be reasonable.
However, the buyer should make sure that the florist’s accounts reflect a true and fair view of
the business before he arrives at a final decision.
Note: 22% = (Average of 8th and 9th year ÷ No. of Firms) × 100

 8  9   8.5
i.e.,    38   100   100 = 22% Approx.
 2   38

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37 
The below information is given about 3 companies.

Particulars Co. A Co. B Co. C

Debt 1,00,000 50,000 -
Equity (Opening Balance) 1,00,000 1,50,000 2,00,000
Enterprise Value 2,00,000 2,00,000 2,00,000
EBIT 30,000 30,000 30,000
Applicable Interest Rate is 9%
Applicable Tax Rate is 25%

Co. A trades at a lower P/E Multiple than its peers Co. B and Co. C. The management of Co. A
believes that the lower P/E of the company is not justified. The management team believes
the market just doesn’t understand its strategy or performance. Assuming book values are
representative of Market Values.
Calculate the P/E and EV/ EBIT of each company and assess whether the management is right
in their thought process.

P/E and EV/EBIT

Answer
Co. A Co. B Co. C
EBIT 30,000 30,000 30,000
Interest 9,000 4,500 -
PBT 21,000 25,500 30,000
Tax 5,250 6,375 7,500
PAT 15,750 19,125 22,500

Opening Equity
1,00,000
1,50,000
2,00,000
Add: PAT during the year 15,750 19,125 22,500
CY Equity 1,15,750 1,69,125 2,22,500

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P/E [MV of Equity / PAT] 7.3 8.8 9.9

Enterprise Value 2,15,750 2,19,125 2,22,500

EV / EBIT 7.2 7.3 7.4

The management’s belief that the markets doesn’t understand the reason for lower P/E
of Co. A is incorrect. The EV/EBITDA multiple of Co. A is in line with the peers. The reason for
the difference is that Co. A has much more debt relative to equity than the other companies.
Possibly, if Co. A has the same level of D/E Ratio, the P/E would be higher and in line with peers.
Except for very high growth companies, a company with higher debt relative to peers has a
lower P/E ratio because more debt translates to higher risk for shareholders and a higher cost
of equity. Therefore, each rupee of earnings (and cash flow to shareholders) is worth less to an
investor.
Since Price-to-earnings ratio mixes capital structure and nonoperating items with expectations
of operating performance, a comparison of P/Es is a less reliable guide to companies’ relative
value than a comparison of enterprise value (EV) to EBIT.
The following principles may help in choosing the right companies to compare.
(a) Use the right multiple, usually net enterprise value to EBITA or net enterprise value to
NOPLAT. Although the P/E is widely used, it is distorted by capital structure and nonoper-
ating gains and losses.
(b) Use forward estimates of earnings: Multiples using forward earnings estimates typically
have much lower variation across peers, leading to a narrower range of uncertainty of
value. They also embed future expectations better than multiples based on historical data.
(c) Adjust the multiple for non-operating items: Non-operating items embedded in reported
EBITA, as well as balance sheet items like excess cash and pension items, can lead to large
distortions of multiples.
(d) Use the right peer group, not a broad industry average: A good peer group must not only
operate in the same industry, but also have similar prospects for ROIC and growth
(e) Value multi-business companies as a sum of their parts: Even companies that appear to
be in a single industry will often compete in subindustries or product areas with widely
varying return on invested capital (ROIC) and growth, leading to substantial variations in
multiples.

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38 
The following is the list of key players in an industry along with their market shares.

Companies A Ltd B Ltd C Ltd D Ltd E Ltd F Ltd G Ltd H Ltd Total
Mkt Share 25.0% 20.0% 15.0% 10.0% 10.0% 5.0% 7.5% 7.5% 100.0%

What would be the HHI for the industry?

What would be the HHI for the industry of C Ltd and D Ltd merge together? Assuming that the
Government will trigger anti-trust issues if the change in HHI is over 100, would there likely be
an anti-trust issue?

Herfindahl-Hirschman Index (HHI)

Answer
The HHI can be calculated as follows:

Companies A Ltd B Ltd C Ltd D Ltd E Ltd F Ltd G Ltd H Ltd HHI
Mkt Share 25% 20% 15% 10% 10% 7.5% 7.5% 5%
Squared Mkt Share 625 400 225 100 100 56.25 56.25 25 1587.5

Considering the score is between 1,000 and 1,800, the industry is moderately concentrated.
The HHI can be calculated after the merger of C and D would be as follows:

Companies A B C+D E F G Ltd H Ltd HHI

Mkt Share 25% 20% 25% 10% 7.5% 7.5% 5%
Squared Mkt Share 625 400 625 100 56.25 56.25 25 1887.5

Considering the score is exceeding 1,800, the industry is likely to be highly concentrated. Also,
since the change in HHI is over 100, the regulator may challenge / investigate the merger.

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Financial Modelling

4. FINANCIAL MODELLING

Financial modelling is the construction of spreadsheet models that illustrate a company’s

likely financial results in quantitative terms. Spreadsheets (e.g. MS Excel) are used for creating
Financial Models. In other words, “spreadsheet” is the medium and “model” is an end-product.
Most financial statement analysis tasks are undertaken with a forward looking decision in
mind and much of the time it is useful to summarize the view developed in the analysis with an
explicit forecast.
Prospective analysis includes two tasks forecasting and valuation that together represent
approaches to explicitly summarizing the valuer’s forward-looking views.The best way to
forecast future performance is to do it comprehensively, producing not only profit in lost
forecast but also forecast of cash flows and the balance sheet. A comprehensive approach is
useful even in cases where one might be interested primarily in the single facet of performance
because it guards against unrealistic implicit assumptions.

4.1 Attributes of good Financial Models

Realistic: most models you develop will be directlyor indirectlyused to make some decisions.
The output of the model must therefore be realistic. This might sometimes be time consuming
but is still necessary.
Error-free: You must extensively test a model to make sure that it is error free. While some
errors are obvious and can be identified since it may not give the desired output. However,
some errors may be subtle and maybe harder to predict. Therefore, it is important to do a
review of the financial model before the output is reported.
Flexible: In the planning stage you should try to anticipate the different types of questions the
model is likely to answer. The more different types of questions a model can answer, the mood
useful it is.
Easy to use: Is important to ensure that the model is easy to use by any user. While fancy
looking dashboards may make the model look attractive it is not necessary.
Easily understandable formula: Many excel models, especially large ones common often
include formula that go on for lines. It is advisable to shorten the formula, use short descriptive
cell and range names to make formulas readable. Sometimes professionals also use VBA
functions to improve the quality and appearance of calculations
Minimum hard-coding: hard coded values that is values embedded in the formulas are
difficult to change especially in large models because there is always a danger of missing them

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in few places. It is advisable that the input cells (sales with manual inputs of numbers or data)
and formulated cells should be clearly distinguished in the entire model.
Good documentation: models should have appropriate documentation such as assumptions,
inputs outputs model description among others.

4.2 Financial Statement Forecasting

The objective of financial statements modelling is to create proforma financial statements in

order to make financial projections that can be used to make decisions. Mansion statement
models are widely used for a variety of purposes including business valuation.
Financial statement modelling involves modelling all the 3 primary financial statements the
income statement balance sheet and the cash flow statement. The cash flow statement is
usually derived from the other two.
The key steps in developing a financial statement model are:
• expected uses of the model and the required output.
• collect historical data for the company, its industry, and its major competitors
• understand the companies plan and develop a comprehensive set of modelling assump-
tions
• build the model and debug it
• improve the model based on feedback.
Using historical data: Financial statement forecasting models start with at least some
historical financial statements of the company. Usually, 3 to 5 years historical financial
statements may be useful to produce projections based on historical data. The statement
should be generally consistent it is not necessary that every number would be correct to the
last rupee. Understanding the footnotes may also be helpful in preparing financial forecasts
also, some historical data for the companies industry and its major competitors will also be
helpful in creating realistic forecasts and benchmarks. Next getting industry forecasts for
market growth price trends expected GDP growth interest rates may be very useful.
Company’s plans: Understanding the company’s plans are critical in preparing the financial
models. While financial statement forecasts can be made using historical data and basic
financial analysis, it may not be useful for anybody if the companies plans are not incorporated
into the financial model. For example, a company may be considering building a new
warehouse to expand its sales. This might require investment in not just a warehouse but in
additional working capital as well. Search increase in capital expenditure and working capital
might lead to increased sales increased cost of goods sold increased expenses higher profits
and other balance sheet items as well. Unless you have a good control on these numbers your
forecasts will not be useful.
Common-size statements: common size statements are very helpful in creating financial
models. In case of a common size statement every item on the profit and loss statement is

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taken as a percentage of the total revenue. Similarly every item on the balance sheet is taken
as a percentage of the total assets. This helps a valuer understand the relationship between
different items in the financial statements. The biggest benefit of a common-size analysis is
that it can let a valuer identify large or drastic changes in a firm’s financials. Rapid increases or
decreases will be readily observable, such as a rapid drop in reported profits during one quarter
or year. This also helps a valuer compare the performance of different companies irrespective
of its size.
Example 1:
The standalone financial statements of Maruti Suzuki for two years are as follows:

Maruti Suzuki Standalone

Balance Sheet as at (₹ Cr)
31-Mar-X2 31-Mar-X1
ASSETS
1. Non Current Assets
Property, plant and equipment 12,916.20 12,163.10
Capital work in progress 1,252.30 1,006.90
Goodwill
Other intangible assets 373.00 346.90
Financial assets
Investments 26,214.70 18,875.40
Loans and advances 0.30 0.40
Other financial assets 23.80 23.10
Non current assets (net)
Other non current assets 1,603.10 1,678.20
42,383.40 34,094.00
2. Current Assets
Inventories 3,262.20 3,132.10
Financial assets
Investments 2,013.70 1,056.80
Trade receivables 1,199.20 1,322.20
Cash and cash equivalents 13.10 39.10
Loans and advances 2.50 3.10
Other financial assets 95.00 147.80
Current tax assets (net) 485.40 485.40
Other current assets 1,538.80 1,659.50
8,609.90 7,846.00
Total Assets 50,993.30 41,940.00

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EQUITY AND LIABILITIES

EQUITY
Equity share capital 151.00 151.00
Other equity 36,020.10 29,733.20
36,171.10 29,884.20
LIABILITIES
1. Non Current liabilities
Provisions 21.90 14.80
Deferred tax liabilities (net) 464.00 194.30
Other non current liabilities 1,105.00 807.50
1,590.90 1,016.60
2. Current liabilities
Financial liabilities
Borrowings 483.60 77.40
Trade payables 8,367.30 7,407.30
Other financial liabilities 1,302.70 1,197.10
Provisions 449.00 398.90
Current tax liabilities (net) 803.60 795.60
Other current liabilities 1,825.10 1,162.90
13,231.30 11,039.20
Total equity and liabilities 50,993.30 41,940.00

Statement of Profit & Loss for the year ended 31-Mar-X2 31-Mar-X1
Income from operations 77,266.20 65,054.60
Other income 2,279.80 1,461.00
Total Income 79,546.00 66,515.60
Expenses
Cost of materials consumed 42,629.60 35,483.90
Purchases of products for sale 4,482.10 3,206.60
Changes in inventories of finished goods, work-in-
progress, and products for sale -380.10 6.90
Excise duty 9,231.40 7,516.50
Employee benefits expense 2,331.00 1,978.80
Finance costs 89.40 81.50
Depreciation and amortisation expense 2,602.10 2,820.20
Other expenses 8,722.80 8,037.70
Amount capitalised / Vehicles for own use -103.60 -60.20
Total Expenses 69,604.70 59,071.90

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Profit/(loss) before exceptional items and tax 9,941.30 7,443.70

Exceptional items
Profit/(loss) before Tax 9,941.30 7,443.70
Tax Expense
Current tax 2,331.70 2,041.40
Deferred tax 271.90 38.00
Total tax expense/(credit) 2,603.60 2,079.40
Profit/(loss) for the year from continuing operations 7,337.70 5,364.30
Other comprehensive income/(loss) 221.70 7.00
Total comprehensive income/(loss) for the year 7,559.40 5,371.30

The following is the common size statement of Tata Motors with Maruti Suzuki for Year X2.

Balance Sheet as at (₹ Cr) Tata Motors Common Maruti Suzuki Common

31-Mar-X2 size 31-Mar-X2 size
ASSETS
1. Non-Current Assets
Property, plant and equipment 17,364.77 29.66% 12,916.20 25.33%
Capital work in progress 1,870.93 3.20% 1,252.30 2.46%
Goodwill 99.09 0.17% 0.00%
Other intangible assets 2,773.69 4.74% 373.00 0.73%
Intangible assets under development 5,366.03 9.17% 0.00%
Investment in subsidiaries & associates 14,778.87 25.25% 0.00%
Financial assets
Investments 528.37 0.90% 26,214.70 51.41%
Loans and advances 389.61 0.67% 0.30 0.00%
Other financial assets 196.32 0.34% 23.80 0.05%
Non-current assets (net) 724.58 1.24% 0.00%
Other non-current assets 1,856.28 3.17% 1,603.10 3.14%
45,948.54 78.50% 42,383.40 83.12%
2. Current Assets
Inventories 5,504.42 9.40% 3,262.20 6.40%
Financial assets
Investments 2,400.92 4.10% 2,013.70 3.95%
Trade receivables 2,128.00 3.64% 1,199.20 2.35%
Cash and cash equivalents 286.06 0.49% 13.10 0.03%
Loans and advances 231.35 0.40% 2.50 0.00%
Other financial assets 100.76 0.17% 95.00 0.19%
Current tax assets (net) 129.49 0.22% 485.40 0.95%

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Other current assets 1,807.06 3.09% 1,538.80 3.02%

12,588.06 21.50% 8,609.90 16.88%
Total Assets 58,536.60 100.00% 50,993.30 100.00%
EQUITY AND LIABILITIES
EQUITY
Equity share capital 679.22 1.16% 151.00 0.30%
Other equity 20,129.93 34.39% 36,020.10 70.64%
20,809.15 35.55% 36,171.10 70.93%
LIABILITIES
1. Non-Current liabilities
Financial liabilities
Borrowings 13,686.09 23.38% 0.00%
Other financial liabilities 1,123.66 1.92% 0.00%
Provisions 850.71 1.45% 21.90 0.04%
Deferred tax liabilities (net) 97.95 0.17% 464.00 0.91%
Other non-current liabilities 321.24 0.55% 1,105.00 2.17%
16,079.65 27.47% 1,590.90 3.12%
2. Current liabilities
Financial liabilities
Borrowings 5,375.52 9.18% 483.60 0.95%
Trade payables 7,015.21 11.98% 8,367.30 16.41%
Other financial liabilities 6,844.43 11.69% 1,302.70 2.55%
Provisions 467.98 0.80% 449.00 0.88%
Current tax liabilities (net) 80.64 0.14% 803.60 1.58%
Other current liabilities 1,864.02 3.18% 1,825.10 3.58%
21,647.80 36.98% 13,231.30 25.95%
Total equity and liabilities 58,536.60 100.00% 50,993.30 100.00%

Statement of Profit & Loss for the year ended 31-Mar-X2 31-Mar-X2
Income from operations 49,100.41 98.05% 77,266.20 97.13%
Other income 978.84 1.95% 2,279.80 2.87%
Total Income 50,079.25 100.00% 79,546.00 100.00%
Expenses
Cost of materials consumed 27,654.40 55.22% 42,629.60 53.59%
Purchases of products for sale 3,945.97 7.88% 4,482.10 5.63%
Changes in inventories of finished goods, -251.43 -0.50% -380.10 -0.48%
work-in- progress, and products for sale
Excise duty 4,736.41 9.46% 9,231.40 11.61%

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Employee benefits expense 3,558.52 7.11% 2,331.00 2.93%

Finance costs 1,590.15 3.18% 89.40 0.11%
Foreign exchange (gain)/loss (net) -252.45 -0.50% 0.00%
Depreciation and amortisation expense 2,969.39 5.93% 2,602.10 3.27%
Product development/Engineering expenses 454.48 0.91% 0.00%
Other expenses 8,697.42 17.37% 8,722.80 10.97%
Amount capitalised / Vehicles for own use -941.55 -1.88% -103.60 -0.13%
Total Expenses 52,161.31 104.16% 69,604.70 87.50%
Profit/(loss) before exceptional items and tax -2,082.06 -4.16% 9,941.30 12.50%
Exceptional items 338.71 0.68% 0.00%
Profit/(loss) before Tax -2,420.77 -4.83% 9,941.30 12.50%
Total tax expense/(credit) 59.22 0.12% 2,603.60 3.27%
Profit/(loss) for the year from continuing -2,479.99 -4.95% 7,337.70 9.22%
operations
Other comprehensive income/(loss) 95.48 0.19% 221.70 0.28%
Total comprehensive income/(loss) for the year -2,384.51 -4.76% 7,559.40 9.50%

Identifying independent and dependent variables: There is no one right way to forecast any
line item. The method you choose depends on your understanding of the business and what
do you think will produce good forecasts. but most often used is the sales driven forecasting.
Most financial statement forecasting models use sales growth rate as a key independent
variable. To decide which line items can be projected as a percentage of sales, the common size
statements are used to project the expenses on the profit and loss statement.
If you look at the common size statements for a company for the past few years you will be able
to spot some stable relationships as well as some trends and you can use them at least for the
first round of forecasting. You may be able to find some such relationships in other financial
indicators as well and use that information to forecast certain line items you should always try
to confirm these relationships using industry data and use a combination of industry numbers
and company numbers to decide numbers in any forecast sometimes management we have
its own target such as target debt to equity ratio dividend growth rate and so on. These
assumptions known as policy assumptions should be documented in the list of assumptions.
Some line items do not flow through sales. For example the interest expense is a function of
the loan that the company might have borrowed. The depreciation amount is a function
of the total amount of fixed assets deployed by the company and their depreciation rates
depreciation methods and the age of the fixed assets. Taxes, as we all know is a percentage of
profit before tax as specified by the government.
Even if you forecast all the line items reasonably well, balance sheet is not likely to balance.
You may use a plug to balance the balance sheet. The items that may be normally used as plug
includes cash and marketable securities, short term debt, long term debt equity. In case of
substantial funding requirements, the company might need additional funds either in the form
of debt or equity and thus it may have to be used as a plug. alternatively cash and marketable

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securities are used plug under normal circumstances. In rare circumstances when the company
policy specifies the amount of cash to be kept, then additional funds may have to be deployed
as investments end shortfall may have to be borrowed and this these may have to be used as a
plug. You should be careful that in the balance sheet there should not be more than one plug
figure.

1
C2D Software Ltd is a software company. The company has shared the following financials with
you.

Statement of Profit & Loss 31-Mar-X0 31-Mar-X1

Revenue from Operations 48,21,92,172 62,52,80,155
Other income 4,34,921 53,89,037
Total Revenue 48,26,27,093 63,06,69,191
Employee Benefit Expenses 34,17,59,823 43,86,61,527
Other Operating Expenses 12,84,95,391 17,82,56,640
Operating Expenses 47,02,55,213 61,69,18,166
EBIDTA 1,23,71,879 1,37,51,025
Less :Depreciation 72,78,205 90,63,847
EBIT 50,93,674 46,87,178
Less : Finance costs 3,24,123 2,12,055
Profit/(Loss) before Tax 47,69,552 44,75,122
Tax 14,30,865 13,42,537
Profit After Tax 33,38,686 31,32,586
Liabilities
Share Capital (Face Value ₹ 1) 1,00,000 1,00,000
Reserves & Surplus 5,24,23,871 5,55,56,457
Shareholders’ Funds 5,25,23,871 5,56,56,457
Long term borrowings 11,29,548 -
Total Non-Current Liabilities 11,29,548 -
Trade Payables 76,00,020 2,40,33,132
Other Current Liabilities 74,56,806 9,65,48,015
Short Term Provisions 1,82,92,000 8,02,340
Total Current Liabilities 3,33,48,826 12,13,83,488
Total Liabilities and Equity 8,70,02,246 17,70,39,944
Assets
Property, Plant & Equipment 2,91,98,966 3,80,07,820
Total Non-Current Assets 2,91,98,966 3,80,07,820

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Current Assets
Trade Receivables 44,26,901 1,55,835
Oher Current Assets 2,42,25,458 4,70,73,342
Loans & Advances 2,88,11,397 6,48,98,260
Cash & Bank balances 3,39,524 2,69,04,687
Total Current Assets 5,78,03,281 13,90,32,124
Total Assets 8,70,02,246 17,70,39,944

As part of its restructuring exercise, the company is planning a major turnaround. You are
hired as a valuer and the company does not have projected financial statements. However,
the management has shared the following information with you to assist in preparing the
financial statement forecasts following by the valuation.
1. The projected financial statements can be prepared for the next 5 years i.e. till FY 20X6.
2. The revenue growth is expected to be 10 % till FY 2024 and then at 7 % for FY 20X5 and
20X6.
3. Operating expenses as a percentage of revenue is expected to be 37 % while Employee
benefit expenses is expected to be 50 % of Revenues. Assume the tax rate to be 30 %.
4. The company expects to collect all its Revenues from customers within 45 days of billing
while it expects to pay to its vendors within 70 days.
5. Other Current Assets would be 5 % of Revenues while Other Current Liabilities would be 10
% of Operating Expenses.
6. The company expects to spend ₹ 20,00,000 annually on Capital Expansion for the next 5
years.
7. The Property, Plant & Equipment is subject to a depreciation rate of 25.89 % on WDV basis.
8. Loans and Advances, and Short term Provisions are not likely to change over the explicit
forecast period.
9. Once the financial forecast are prepared, the following information may be relevant for
valuation purposes:
As on valuation date, the long term Government bond yield is 6 %.
Market Return over the long period is 15 %.
Estimated Beta based on comparable companies is 1.25.
The company does not expect to have any debt in the long run.
In the perpetual period, Depreciation is expected to offset Capital expenditure and Change in
Working Capital is expected to be 1 % of change in Revenue in the explicit forecast period.
The terminal growth in Free Cash Flows is estimated at 4 %, in line with long term inflation of
the country.

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Financial Modelling Financial Statement Forecast

Answer
The forecasted financial statements are prepared as follows: (₹ in lakhs)

Statement of Profit & FY x1 FY x2 FY x3 FY x4 FY x5 FY x6

Loss Actual Projected Projected Projected Projected Projected
Revenue from 6,252.80 6,878.08 7,565.89 8,322.48 8,905.05 9,528.41
Operations
Revenue growth 10% 10% 10% 7% 7%
Other income 53.89 - - - - -
Total Revenue 6,306.69 6,878.08 7,565.89 8,322.48 8,905.05 9,528.41

Employee Benefit 4,386.62 3,439.04 3,782.94 4,161.24 4,452.53 4,764.20

Expenses
% of Revenues 50% 50% 50% 50% 50%
Other Operating 1,782.57 2,544.89 2,799.38 3,079.32 3,294.87 3,525.51
Expenses
% of Revenues 37% 37% 37% 37% 37%
Operating Expenses 6,169.18 5,983.93 6,582.32 7,240.56 7,747.40 8,289.71
EBIDTA 137.51 894.15 983.57 1,081.92 1,157.66 1,238.69
Less :Depreciation 90.64 103.58 81.94 65.90 54.02 45.21
(Note 1)
EBIT 46.87 790.57 901.62 1,016.02 1,103.64 1,193.48
Less: Finance costs 2.12 - - - - -
Profit/(Loss) before Tax 44.75 790.57 901.62 1,016.02 1,103.64 1,193.48
Tax [@ 30% on PBT] 13.43 237.17 270.49 304.81 331.09 358.04
Profit After Tax 31.33 553.40 631.14 711.21 772.55 835.44

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(₹ in lakhs)

FY x1 FYx2 FYx3 FYx4 FYx5 FYx6

Balance Sheet
Actual Projected Projected Projected Projected Projected
Liabilities & Equity
Share Capital 1.00 1.00 1.00 1.00 1.00 1.00
Reserves & Surplus 555.56 1,108.96 1,740.10 2,451.31 3,223.86 4,059.30
Shareholders’ Funds 556.56 1,109.96 1,741.10 2,452.31 3,224.86 4,060.30
Trade Payables 240.33 488.06 536.87 590.55 631.89 676.13
Other Current Liabilities 965.48 598.39 658.23 724.06 774.74 828.97
Short Term Provisions 8.02 8.02 8.02 8.02 8.02 8.02
Total Current Liabilities 1,213.83 1,094.48 1,203.12 1,322.63 1,414.66 1,513.12
Total Liabilities and 1,770.40 2,204.44 2,944.22 3,774.95 4,639.51 5,573.42
Equity
Assets
Property, Plant & 380.08 296.50 234.56 188.65 154.63 129.42
Equipment (Note 1)
Total Non Current 380.08 296.50 234.56 188.65 154.63 129.42
Assets
Current Assets
Investments - - 371.31 1,079.00 1,847.51 2,667.44
Trade Receivables 1.56 847.98 932.78 1,026.06 1,097.88 1,174.73
Oher Current Assets 470.73 343.90 378.29 416.12 445.25 476.42
Loans & Advances 648.98 648.98 648.98 648.98 648.98 648.98
Cash & Bank balances 269.05 67.07 378.29 416.12 445.25 476.42
(Note 2)
Total Current Assets 1,390.32 1,907.94 2,709.67 3,586.29 4,484.88 5,444.00

Total Assets 1,770.40 2,204.44 2,944.22 3,774.95 4,639.51 5,573.42

Note 1: Depreciation calculation (₹ in lakhs)

FY X2 FY X3 FY X4 FY X5 FY X6
General PP&E
Opening WDV 380.08 296.50 234.56 188.65 154.63
Add: Net Additions 20.00 20.00 20.00 20.00 20.00
(Assumed beginning of
year)
Sub-total 400.08 316.50 254.56 208.65 174.63
Total Depreciation 25.89% 103.58 81.94 65.90 54.02 45.21
Closing WDV 296.50 234.56 188.65 154.63 129.42

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Note 2: Cash and Short term Investments

For FYx2, the cash balance is a plug figure as it is less than 5% of Total Revenues. For the
remaining years, the Cash balance is 5 % of Total Revenues and any balance amount is invested
for short term. Note that it would be inappropriate to keep either Cash or Investments as a
negative figure.
Note 3: Calculation of Cost of Equity and Discount Rate

Risk Free Rate of Return 6.00%

Market Return 15.00%
Beta 1.25
Unsystematic Risk Premium 0%
Cost of Equity 17.25%
Discount Rate 17.25%

Note 4: Calculation of Investment in Non Cash Working Capital (₹ in lakhs)

Year FY X1 FY X2 FY X3 FY X4 FY X5 FY X6
Total Current Assets 1,390.32 1,907.94 2,709.67 3,586.29 4,484.88 5,444.00
Less: Cash and Bank Balances 269.05 67.07 378.29 416.12 445.25 476.42
Non Cash Current Assets (A) 1,121.27 1,840.87 2,331.37 3,170.17 4,039.63 4,967.58
Current Liabilities 1,213.83 1,094.48 1,203.12 1,322.63 1,414.66 1,513.12
Short term Provisions 8.02 8.02 8.02 8.02 8.02 8.02
Adjusted Current Liabilities (B) 1,205.81 1,086.45 1,195.10 1,314.61 1,406.63 1,505.10
Non Cash Working Capital -84.54 754.42 1,136.27 1,855.56 2,633.00 3,462.48
(A – B)
Change in Non Cash Working 838.95 1,136.27 1,101.15 1,496.72 1,606.92
Capital

Note 5: Calculation of Present Value of Terminal Value (₹ in lakhs)

Calculation of FCFF Terminal (₹)

Net profit After Tax [Same as FY x6] 835.44
Plus: Net Non Cash Charges [same as FY x6] 20.00
Plus: Post tax Interest Expense [NIL, since no Debt] -
Less: Investment in Fixed Capital [Same as Depreciation] 20.00
Less: Investment in Non-Cash Working Capital [9,528.41 – 8,905.05] × 1% 6.23
Free Cash Flow to Firm 829.20
Terminal Value [FCFF × (1 + gn) / (WACC – gn)] [829.20 × (1.04) / (0.1725 - 0.04)] 6,508.46
PV of FCFF including Terminal Value [TV / (1+g)^n] [6,508.46 / (1.1725)^5] 2,937.07

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Calculation of Free Cash Flows to the Firm and Value per share (₹ in lakhs)

Calculation of FCFF (₹ Lakhs) FY X1 FY X2 FY X3 FY X4 FY X5 FY X6

Net profit After Tax 553.40 631.14 711.21 772.55 835.44
Plus: Net Non Cash Charges 103.58 81.94 65.90 54.02 45.21
Plus: Post tax Interest Expense - - - - -
Less: Capital Expenditure - 20.00 20.00 20.00 20.00
Less: Change in NC Working Capital 838.95 381.86 719.29 777.44 829.48
(N4)
Free Cash Flow to Firm -181.97 311.22 37.83 29.13 31.17
Terminal Value - - - - -
PV of FCFF including Terminal Value -155.20 226.38 23.47 15.41 14.07
PV of Cash Flows (explicit period) 124.13
PV of Terminal Value (Note 5) 2,937.07
Firm Value 3,061.20
Less: Debt -
Add: Cash 269.05
Value of Equity (₹ lakhs) 3,330.24
Value per share (₹) 3,330.24

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Multiple Choice Questions

1. When merger is between two companies that are into the same products or services, it is
called a _____
(a) horizontal merger
(b) vertical merger
(c) Conglomerate merger
(d) diagonal merger
2. In a _____ , the companies are in different points in the value chain
(a) horizontal merger
(b) vertical merger
(c) Conglomerate merger
(d) diagonal merger
3. If the acquirer moves up the value chain towards the ultimate consumer it is called _____
(a) vertical merger
(b) Conglomerate merger
(c) Forward integration
(d) Backward integration
4. An ice cream manufacturer acquires restaurants where it can serve ice cream. It is an
example of which type of merger ?
(a) vertical merger
(b) Conglomerate merger
(c) Forward integration
(d) Backward integration
5. If the acquirer moves down the value chain towards raw materials it is called _____
(a) Conglomerate merger
(b) Backward integration
(c) horizontal merger
(d) diagonal merger
6. A _____ is one where the merging companies are neither into the same products or
services, nor in the same business
(a) Conglomerate merger
(b) vertical merger

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(c) Diagonal merger

(d) Both a and c
7. In 2018, Walmart acquired 77 percent stake in Flipkart India for USD 16 billion. Is it an
example of merger or acquisition?
(a) Acquistion
(b) Merger
(c) Both
(d) None of these
8. Acquisitions create value when the cash flows of the combined companies are greater
than the sum of their individual values. Is it true ?
(a) False
(b) True
(c) May be
(d) None of these
9. the purchase price of an acquisition will nearly always be _____ than the intrinsic value of
the target company
(a) Higher
(b) Lower
(c) Constant
(d) None of these
10. The net present value of the cashflows that will result from improvements made when the
companies are combined is known as
(a) Intrinsic value
(b) Market value
(c) Synergy value
(d) Purchase value
11. Value gap is the difference between _____ and _____
(a) Synergy value and purchase price
(b) Intrinsic value and purchase price
(c) Market value and purchase price
(d) Intrinsic value and Synergy value
12. _____ refers to the excess that an acquirer pays over the market trading value of the target
company’s shares being acquired.
(a) purchase premium

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 Valuation in Mergers and Acquisitions

(b) acquisiton premium

(c) Both
(d) None of these
13. _____ are those where an acquirer intends to run the company themselves. There are
significant changes in the way the company operates.
(a) Financial Acquisition
(b) Strategic acquisitions
(c) Hostile takeover
(d) None of these
14. _____ are often done by Private Equities, Venture Capitalists and portfolio companies who
acquirer a company purely for their value and normally do not make significant opera-
tional changes
(a) Financial Acquisition
(b) Strategic acquisitions
(c) Hostile takeover
(d) None of these
15. When the target’s management or Board of Directors are not receptive to the idea of a
merger, the acquirer may take the deal directly to the target’s shareholders through a
tender offer or a proxy fight is known as
(a) Hostile Merger
(b) Friendly Merger
(c) Strategic acquisitions
(d) Financial Acquisition
16. In a tender offer:
(a) The acquirer invites target shareholders individually to submit their shares for a
payment
(b) The payment can be in the form of cash, shares of the acquirer, other securities, or a
combination of cash and securities
(c) Both a and b
(d) None of these
17. In a proxy fight:
(a) The acquirer approaches target shareholders to vote for an acquirer-nominated board
of directors)
(b) Proxy solicitation is approved by regulators and then proxies are mailed directly to
target shareholders

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(c) Both a and b

(d) None of these
18. _____ grant a company the right to issue stock options to existing shareholders enabling
them to purchase additional shares of stock at significantly discounted prices.
(a) Poison pills
(b) Poison puts
(c) Share repurchase
(d) None of these
19. _____ give target company bondholders the right to sell their bonds back to the target at
a pre-specified redemption price in the event of a takeover.
(a) Poison pills
(b) Poison puts
(c) Share repurchase
(d) None of these
20. If the combined entity is more than the sum of its parts, the transaction is said to have
created _____
(a) Combined Value
(b) Net Worth
(c) Synergies
(d) Economic gains
21. If the Value of target Co. is ₹ 500 Million and the value of acquiring company is ₹ 800 Million.
Present value of cost savings if the two companies are merged together is ₹ 100 million.
Acquiring company expects the cost of integration as ₹ 80 million and the shareholders
of Target Co. are expecting a deal premium to be paid of 15 percent over their company’s
value. what is the value of Combined entity?
(a) ₹ 1,400 million
(b) ₹ 1,345 million
(c) ₹ 1,445 million
(d) ₹ 1,540 million
22. The merger of one or more companies with another company or the merger of two or
more companies to form one company is called _____
(a) Demerger
(b) Acquisition
(c) Amalgamation
(d) Slump sale

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23. The transfer of one or more undertaking for a lump sum consideration without values
being assigned to the individual assets and liabilities is known as _____
(a) Demerger
(b) Acquisition
(c) Amalgamation
(d) Slump sale
24. The Income tax Act, 1961 define ‘’amalgamation” under Section
(a) 1(1B)
(b) 2(1B)
(c) 3(B)
(d) 2(2B)
25. The difference between the current market value of a firm and the capital contributed by
investors is
(a) Economic Value Added
(b) Market Value Added
(c) Enterprise Value Added
(d) Book value Added
26. Future retail Ltd and Reliance Ltd go into liquidation and a new company Reliance Retail
Ltd is formed. It is a case of:
(a) Absorption
(b) External reconstruction
(c) Amalgamation)
(d) Take over
27. Reliance Ltd takes over the business of Future retails. It is a case of:
(a) Absorption
(b) External reconstruction
(c) Amalgamation)
(d) Take over
28. Future retail Ltd is liquidated and a new company Future Enterprises is formed to take over
its business. It is a case of:
(a) Absorption
(b) External reconstruction
(c) Amalgamation)
(d) Take over

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29. Why Amalgamation is known to be in the nature of merger:

(a) There is transfer of all assets & liabilities at book values)
(b) Issue of equity shares discharged the Purchase consideration wholly (except cash for
fractional shares)
(c) Equity shareholders holding 90% equity shares in Transferor Company become share-
holders of Transferee Company)
(d) All of the above
30. Net assets minus capital reserve is:
(a) Goodwill
(b) General reserves
(c) Purchase consideration
(d) None of the above
31. If purchase consideration is more than net assets of the transferor company, then differ-
ence will be shown as:
(a) Goodwill account
(b) Capital reserve account
(c) General reserve account
(d) None of the above
32. If purchase consideration is less than net assets of the transferor company, then difference
will be shown as:
(a) Goodwill account
(b) Capital reserve account
(c) General reserve account
(d) None of the above
33. The difference between the purchase consideration and net asset is adjusted in case of
merger is adjusted with:
(a) Goodwill account
(b) Capital reserve account
(c) General reserve account
(d) None of the above
34. In the books of Transferor Company, shares received from the new company are recorded
at:
(a) Face value
(b) Market Price

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 Valuation in Mergers and Acquisitions

(c) Intrinsic value of shares

(d) None of the above
35. Intangible assets are treated as _____ assets.
(a) Fictitious assets
(b) Fixed assets
(c) Cash and cash equivalents)
(d) Marketable securities
36. _____ is a measure of value of which tells wheather a company is able to generate returns
that exceed the cost of capital employed.
(a) Economic Value Added
(b) Market Value Added
(c) Enterprise Value Added
(d) Book value Added
37. If a bond of a company is trading at a premium in the market then its yield-to-maturity will
be _____ its current yeild.
(a) more than
(b) less than
(c) same as
(d) no effect on
38. Net operating Profit After Taxes is called _____.
(a) Economic Value Added
(b) Market Value Added
(c) Enterprise Value Added
(d) Book value Added
39. EVA is _____ related to shareholder’s value .
(a) directly
(b) inversely
(c) not related
(d) None of the above
40. Which is not a, human-capital related intangible assets?
(a) Trained workforce
(b) Employment agreements
(c) Union Contracts

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(d) Design patent

41. X ltd has ₹ 100 crores worth of common equity on its balance sheet comprising of 50 lakhs
shares. The company’s market value Added (MVA) is ₹ 24 crores. What is company’s stock
price?
(a) 230
(b) 238
(c) 248
(d) 264
42. A firm’s current assets and current liabilities are 1,600 and 1,000 respectively . How much
can it borrow on a short-term basis without reducing the current ratio below 1.25?
(a) 1,000
(b) 1,200
(c) 1,400
(d) 1600
43. Identify which of the following is not a financial liability
(a) X ltd has 1 lakh ₹ 10 ordinary shares issued
(b) X ltd has 1 lakh 8% ₹ 10 redeemable preference shares issued
(c) X Ltd has ₹ 2,00,000 of 6% bonds issued
(d) Both (A) and (B)
44. An investment is the risk free when actual returns are always the expected returns.
(a) equal to
(b) less than
(c) more than
(d) depends upon circumstances
45. which of the followings is not a attribute of good financial models
(a) Realistic
(b) Flexible
(c) Hard coded values
(d) Good documentation
46. When amalgamation is in the nature of merger, the accounting method to be followed is:
(a) Equity method
(b) Purchase method
(c) Pooling of interests method

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 Valuation in Mergers and Acquisitions

(d) Consolidated method

47. What are the tax consequences of a taxable merger ?
(a) Selling shareholders can defer any capital gain until they sell their shares in the merged
company
(b) Depreciation tax shield is unchanged by merger
(c) Selling shareholders must recognize any capital gain
(d) Depreciable value of assets will remain unchanged
48. _____ give target company bondholders the right to sell their bonds back to the target at
a pre-specified redemption price in the event of a takeover.
(a) Poison pills
(b) Poison puts
(c) Share repurchase
(d) None of these
49. Future retail is liquidated and a new company Future Enterprise is formed to take over its
business. It is a case of:
(a) Absorption
(b) External reconstruction
(c) Amalgamation
(d) Take over
(e) If the Value of target Co. is ₹ 500 Million and the value of acquiring company is
50. ₹ 800 Million. Present value of cost savings if the two companies are merged together is
₹ 100 million. Acquiring company expects the cost of integration as ₹80 million and the
shareholders of Target Co. are expecting a deal premium to be paid of 15 percent over their
company’s value. What is the value of Combined entity?
(a) ₹ 1,400 million
(b) ₹ 1,345 million
(c) ₹ 1,445 million
(d) ₹ 1,540 million
51. If the divestiture value is greater than the present value of the expected cash flows, the
value of the divesting firm will _____.
(a) increase on the divestiture
(b) decrease on the divestiture
(c) remain same on the divestiture
(d) None of the above

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52. _____ are often done by Private Equities, Venture Capitalists and portfolio companies who
acquirer a company purely for their value and normally do not make significant opera-
tional changes.
(a) Financial Acquisition
(b) Strategic acquisitions
(c) Hostile takeover
(d) None of these
53. 8% bond of Face Value ₹ 100 is selling for ₹ 96. What would be its Current Yield?
(a) 8%
(b) 12%
(c) 8.33%
(d) None of the above
Answer :

1 a 13 b 25 b 37 b
2 b 14 a 26 c 38 a
3 c 15 a 27 a 39 a
4 c 16 c 28 b 40 d
5 b 17 c 29 d 41 c
6 d. 18 a 30 c 42 c
7 a 19 b 31 a 43 a
8 b 20 c 32 b 44 a
9 a 21 a 33 c 45 c
10 c 22 c 34 b 46 c
11 b 23 d 35 b 47 c
12 a 24 b 36 a

48 (b) Poison puts means that if the acquirer takes over the target, it would need to raise
a substantial amount of cash to refinance the target’s debt.
49 (b) This is the case of external reconstruction. External reconstruction means where
the company goes into liquidation, to form a new company.
50 (a)
51 (a)
52 (a)
53 (a)

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