Mergers, Acquisitions &

Corporate Restructuring
 Mergers, Acquisition & Corporate Restructuring

A. Post-merger EPS and related calculations

QUESTION 1:
N 19 | M 12 | M 05 | M 03 | N 02 | RTP

XYZ Ltd., is considering merger with ABC Ltd. XYZ Ltd.’s shares are currently traded at ₹ 20. It has
2,50,000 shares outstanding and its earnings after taxes (EAT) amount to ₹ 5,00,000. ABC Ltd., has
1,25,000 shares outstanding; its current market price is ₹ 10 and its EAT are ₹ 1,25,000. 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:
a. What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
b. If ABC Ltd.’s P/E ratio is 6.4, what is its current market price? What is the exchange ratio? What
will XYZ Ltd.’s post-merger EPS be?
c. Show the impact on earnings of the shareholders of two companies.
Solution:
(i) Pre-merger EPS & PE Ratio:
XYZ ABC
Pre-merger EPS 500,000/250,000 = 2 125,000/125,000 = 1
PE Ratio 20/2 = 10 10/1 = 10
(ii) MPS = EPS  PE Ratio
MPS = 6.4  1 = ₹ 6.4
Purchase Consideration (MV of ABC ltd.) = 6.4  1,25,000
= 8,00,000
Purchase Consideration
No. of shares to be issued =
Issue Price
8,00,000
=
20
= 40,000
40,000
Exchange Ratio =
1,25,000
= 0.32
5,00 ,000 + 1,25,000
Post-merger EPS =
2,50 ,000 + 1,25,000  0.32
= 2.16
(iii) Impact on earnings of shareholders:
105
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Equivalent EPS of ABC Ltd = 2.16  0.32 = 0.6912

XYZ ABC
Post-merger EPS & Equivalent EPS 2.16 0.6912
Less: Pre-merger EPS 2 1
Gain/(loss) per share 0.16 -0.3088
 No. of shares 2,50,000 1,25,000
Total gain/(loss) 40,000 -40,000

QUESTION 2:
N 09

B Ltd. is highly successful company and wishes to expand by acquiring other firms. Its expected
high growth in earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of B
Ltd. has been advised that if it were to take over firms with a lower PE ratio than its own, using a
share-for-share exchange, then it could increase its reported earnings per share. C Ltd. has been
suggested as a possible target for a takeover, which has a PE ratio of 10 and 1,00,000 shares in
issue with a share price of ₹ 15. B Ltd. has 5,00,000 shares in issue with a share price of ₹ 12.
Calculate the change in earnings per share of B Ltd. and C Ltd. if it acquires the whole of C Ltd. by
issuing shares at its market price of ₹ 12. Assume the price of B Ltd. shares remains constant.
Solution:
B Ltd. C Ltd.
PE Ratio 17 10
No. of shares 5,00,000 1,00,000
MP/ Issue Price 12 15
Purchase Consideration (MV of C ltd.) = 15  1,00,000
= 15,00,000
Purchase Consideration
No. of shares to be issued =
Issue Price
15,00,000
=
12
= 1,25,000
1,25,000
Exchange Ratio =
1,00,000
= 1.25
Pre-merger earnings of companies:

106
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

B Ltd C Ltd
MPS 12 15
 No. of shares 5,00,000 1,00,000
Market Capitalization 60,00,000 15,00,000
÷ PE ratio 17 10
Pre-merger PAT 3,52,941 1,50,000
3,52,941 + 1,50,000
Post-merger EPS =
5,00,000 + 1,25,000
= 0.8047
Change in earnings per share of B Ltd. and A Ltd
Equivalent EPS: 1.25  0.8047 = 1.0059
B Ltd C Ltd
Post-merger EPS 0.8047
Equivalent EPS 1.0059
Less: Pre-merger 0.7059 1.5
Gain/(loss) per share 0.0988 -0.4941
EPS of B will increase from ₹ 0.7059 to ₹ 0.8047 & EPS of C will decrease from ₹ 1.5 to ₹ 1.0059
(equivalent EPS).

QUESTION 3:

The Directors of Aqua Limited are considering the acquisition of an Existing Company Bose Limited
engaged in the line of business suited to them. The Financial Data at the time of acquisition being:
Company Aqua Ltd. Bose Ltd.
Earnings after tax (₹) 36,00,000 7,20,000
Earnings per share 5 2.5
No. of Equity Shares 7,20,000 3,00,000
PE Ratio 30 20
It is expected that the Net Profit after Tax of the two Companies would continue to be ₹ 43,20,000.
Aqua Ltd would pay the amount in the form of Shares of Aqua Ltd. Explain the effect on EPS of the
Merged Company if Aqua Ltd offers to pay 60 per share to the Shareholders of Bose Ltd.
Solution:
MV of Bose ltd = 60  3,00,000
= 1,80,00,000
107
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

MPS of Aqua Ltd = 30  5

= 150
1,80,00,000
No. of Share to be issued =
150
= 1,20,000
36,00,000 + 7,20,000
Post-merger EPS =
7,20,000 + 1,20,000
= 5.1428
Effect on EPS of the Merged Company (Aqua Ltd)
Post-merger EPS 5.1428
Less: Pre-merger 5.0000
Gain/(loss) per share 0.1428

QUESTION 4:
N 10 | N 08 | RTP

MK Ltd. considering acquiring NN Ltd. The following information is available:

Company Earnings after tax (₹) No. of Equity Shares Market price Per Share (₹)
MK Ltd. 60,00,000 12,00,000 200.00
NN Ltd. 18,00,000 3,00,000 160.00
Exchange of equity shares for acquisition is based on current market values. There is no synergy
advantage.
a) Find the earning per share for company MK Ltd. after merger, and
b) Find the exchange ratio so that shareholders of NN Ltd. would not be at a loss.
Solution:
MPS of Target
(i) Swap Ratio =
MPS of Acquiror
= 160 = 0.80
200
60,00,000 + 18,00,000
Post-merger EPS =
12,00,000 + 3,00,000 × 0.80
= 5.417
(ii) Exchange Ratio so that shareholders are not at loss means the Breakeven Ratio:
Pre-merger EPS of MK Ltd. = ₹ 60,00,000/12,00,000 = ₹ 5.00
Pre-merger EPS of NN Ltd. = ₹ 18,00,000/3,00,000 = ₹ 6.00
108
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

∴ Exchange ratio should be 6:5

Justification:
60,00,000 + 18,00,000
Post-merger EPS =
12,00,000 + 3,00,000 × 1.2
= ₹ 5.00 per share
Post-merger earnings of NN Ltd = 3,00,000 × 1.2 × ₹ 5.00 = ₹ 18,00,000
Pre-merger earnings of NN Ltd. = ₹ 18,00,000
Hence, No loss of earnings

QUESTION 5:
N 17 | M 04 | RTP

M Co. Ltd. is studying the possible acquisition of N Co. Ltd., by way of merger. The following data
are available in respect of the companies:
Particulars N Co. Ltd M Co. Ltd
Profit After Tax ₹ 24,00,000 ₹ 80,00,000
Equity Shares outstanding (Nos.) 4,00,000 16,00,000
Market Price per share ₹ 160 ₹ 200
a. What is the present EPS of both the companies?
b. If the merger goes through by exchange of equity, what is the new earning per share for M
Co. Ltd.?
c. N 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?
d. What should be exchange ratio, if N Co. Ltd. wants to ensure the earnings to members are
same as before the merger takes place?
e. What should be the exchange ratio; if M Co. Ltd.’s pre-merger and post-merger EPS are to be
the same?
Solution:
PAT
a) EPS =
n
80,00,000
M Co Ltd. = =5
16,00,000
24,00,000
N Co Ltd. = =6
4,00,000
b) Swap Ratio Based on MPS = 160 = 0.80
200

109
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

80,00,000 + 24,00,000
Post-merger EPS =
16,00,000 + 4,00,000 × 0.80
= 5.4167
c) Exchange ratio where earnings should not be diminished should be based on EPS
₹ 80,00,000
Pre-merger EPS of M Co. Ltd. = =₹5
16,00,000
₹ 24,00,000
Pre-merger EPS of N Co. Ltd. = =₹6
4,00,000
Exchange ratio where earnings will be maintained = 6:5 or 1.2
Justification:
80,00,000 + 24,00,000
Post-merger EPS =
16,00,000 + 4,00,000 × 1.2
=₹5
For M Ltd: Post-merger EPS =₹5
Pre-merger EPS =₹5
For N Ltd: Post- merger Earnings = 4,00,000 × 1.2 × 5 = 24,00,000
Pre-merger earnings = 24,00,000
Hence, No loss of earnings
d) Same as (c)
e) Same as (c)

QUESTION 6:
M 23

Big Ltd. (BL), a listed company, is enjoying a price earnings ratio (PER) of 15 on an Earnings Per
Share (EPS) of ₹ 5. The Total number of outstanding shares are 2,00,000.
BL is proposing to acquire Small Pvt. Ltd. (SPL) an unlisted company by issuing shares in the ratio
4:5 i.e., for 5 shares of SPL 4 shares of BL will be issued. The outstanding shares of SPL are 50,000.
SPL will be listed before the actual merger to discover its value. The EPS of the merged entity will
be ₹ 5.5.
No other information is available for SPL. You are required to calculate:
a. Pre-merger EPS of SPL.
b. Expected Market Price per Share of SPL at the time of listing, if it expects a PER of 10 and,
c. Number of shares of BL to be issued to SPL if pre-merger EPS of BL is to be maintained.
Solution:
110
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

a) Pre-merger earnings of BL = 5  2,00,000

= 10,00,000
Calculating Pre-merger PAT of SPL using post-merger EPS:
PATBL + PATSPL
Post-merger EPS =
nBL + nSPL × ER
10,00,000 + PATSPL
5.5 =
2,00,000 + 50,000 × 4⁄5
PATSPL = 3,20,000
3,20,000
Premerger EPS pf SPL = = ₹ 6.4 per share
50,000
b) Premerger MPS of SPL = 6.4  10 = ₹ 64
EPS of SPL
c) Exchange ratio to maintain EPS = = 6.4:5
EPS of BL
Number of shares to be issued to SPL = 50,000  6.4/5 = 64,000 shares
Self-note: While solving part (a) of the question, we have assumed that there is no synergy in
earnings.

QUESTION 7:

Consider the same situation as in question 5 and also synergy in earnings of ₹ 16,00,000 per
annum.
Particulars N Co. Ltd M Co. Ltd
Profit After Tax ₹ 24,00,000 ₹ 80,00,000
Equity Shares outstanding (Nos.) 4,00,000 16,00,000
Market Price per share ₹ 160 ₹ 200
a. What will be the post-merger EPS?
b. What is the maximum exchange ratio at which shareholders of M Co Ltd will not suffer loss?
c. What is the minimum exchange ratio at which earnings of shareholders of N Co. Ltd will not
decline?
Solution:
24,00,000 + 80,00,000 + 16,00,000
(i) Post-merger EPS =
4,00,000 × 0.80 + 16,00,000
1,20,00,000
= = 6.25
19,20,000

111
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

(ii) For SHs of M Co. Ltd to not suffer loss, their:

Post-merger EPS = Pre-merger EPS
24,00,000 + 80,00,000 + 16,00,000
=5
4,00,000 × ER + 16,00,000
ER = 2
(iii) For SHs of N Co. Ltd to not suffer loss, their:
Post-merger Adjusted EPS = Pre-merger EPS
Post MPS  ER = Pre-merger EPS
24,00,000 + 80,00,000 + 16,00,000
[ ] ER = 6
4,00,000 × ER + 16,00,000
ER =1

QUESTION 8:

The following information is provided related to the acquiring Earth Limited and the target
Neptune Limited:
Particulars Earth Ltd Neptune Ltd
Profit After Tax ₹ 2000 Lakhs ₹ 400 Lakhs
Equity Shares outstanding (Nos.) 200 Lakhs 100 Lakhs
PE Ratio 10 times 5 times
Earth Ltd agrees to offer cash consideration of ₹ 25 per share. It will fund the acquisition by selling
its investments which are presently earning a return of 12.5%. What will be the impact on the
earnings of the shareholders of Earth Ltd. How much cash per share can Earth Ltd pay without loss
of its earnings to its shareholder. Tax rate is 20%.
Solution:
2000 lakh
Pre-merger EPS of Earth Ltd = = ₹ 10
200 lakh
Purchase consideration = ₹ 25 per share  1,00,00,000
= 25,00,00,000
Interest on purchase consideration = 25,00,00,000  12.5%
= 3,12,50,000
Interest after tax = 3,12,50,000  (1 - 0.20)
= 2,50,00,000

112
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

20,00,00,000 + 4,00,00,000 - 2,50,00,000

Post-merger EPS =
2,00,00,000
= ₹ 10.75
Change in earnings of shareholders of Earth ltd.:
Post-merger EPS 10.75
Less: Pre-merger EPS 10
Gain/(loss) per share 0.75
 No. of shares 200 lakhs
Total gain/(loss) 150 lakhs
Maximum cash per share considering EPS:
20,00,00,000 + 4,00,00,000 - PC × 12.5% × (1 - 20%)
= 10
2,00,00,000
PC = 4000 Lakh
4000 lakh
Cash per share =
100 lakh
= ₹ 40 per share

QUESTION 9:
M 16 | RTP

The CEO of a company thinks that shareholders always look for EPS. Therefore, he considers
maximization of EPS as his company’s objective. His company’s current Net profits are ₹ 80.00
lakhs and P/E multiple is 10.5. He wants to buy another firm which has current income of ₹ 15.75
lakhs & P/E multiple of 10.
What is the maximum exchange ratio which the CEO should offer so that he could keep EPS at the
current level, given that the current market price of both the acquirer and the target company are
₹ 42 and ₹ 105 respectively?
If the CEO borrows funds at 15% and buys out Target Company by paying cash, how much cash
should he offer to maintain his EPS? Assume tax rate of 30%.
Solution:
Acquirer Target
Net Profit (EAES) ₹ 80,00,000 ₹ 15,75,000
P/E Multiple 10.5 10
Market Price 42 105
No. of Shares 20,00,000 1,50,000
EPS ₹4 ₹ 10.50
113
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Calculating Maximum Exchange Ratio:

80,00,000+15,75,000
=4
20,00,000+1,50,000 × ER
ER = 2.625
Calculating Maximum Cash:
80,00,000 + 15,75,000 - PC × 0.15 × (1 - 0.3)
=4
20,00,000
PC = Total cash to offer = 150,00,000
1,50,00,000
Cash per share = = 100
1,50,000

114
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

B. Post-merger MPS and related calculations

1. When question is silent about synergy
QUESTION 10:
N 22 | M 18 | N 09 | N 07

A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1 : 2 (0.5 shares for every one share
of T Ltd.) following information is provided:
Particulars A Ltd T Ltd
Profit After Tax (₹) 18,00,000 3,60,000
Equity Shares outstanding (Nos.) 6,00,000 1,80,000
EPS ₹3 ₹2
PE Ratio 10 times 7 times
Market Price per share ₹ 30 ₹ 14
1. You are required to determine:
a. The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
b. What is the EPS of A Ltd. after the acquisition?
c. Determine the equivalent earnings per share of T Ltd.
d. What is the expected market price per share of A Ltd. after the acquisition, assuming its
PE multiple remains unchanged?
e. Determine the market value of the merged firm.
f. Ascertain the profits accruing to the shareholders of both the companies.
2. If you are the shareholder of T Ltd & holding 100 shares, will you be interested to sell your
stake? Why?
Solution:
1) (a) No. of equity shares = 1,80,000  0.50 = 90,000
18 ,00 ,000 + 3,60 ,000
(b) Post-merger EPS =
6,00 ,000 + 1,80 ,000  0.50
= 3.130
(c) Equivalent EPS = 3.13  0.50 = 1.565
(d) Expected MPS after acquisition = 3.10  10
= ₹ 31.3
(e) MV of Merged firm = (18,00,000 + 3,60,000)  10
= 2,16,00,000
(f) Profit accruing to the shareholders:
115
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Equivalent MPS = 31.3  0.5 = 15.65

A Ltd. T Ltd.
Post-merger MPS or Equivalent MPS 31.30 15.65
Less: Pre-merger MPS -30 -14
Gain / (Loss) per share 1.3 1.65
 No. of shares 6,00,000 1,80,000
Total gain / (loss) 7,80,000 2,97,000

2) Pre-merger value of 100 shares = 14  100 = 1,400

Equivalent value of 100 shares = 15.65  100 = 1,565
No, I am not agreed to sell the stake as there is increase in market value.

QUESTION 11:
M 22 | M 09 | N 04 | RTP M 09

Following information is provided relating to the acquiring company Mani Ltd. and the target
company Ratnam Ltd.:
Particulars Mani Ltd Ratnam Ltd
Profit After Tax (₹ lakhs) 2,000 4,000
Equity Shares outstanding (Lakh Nos.) 200 1,000
PE Ratio 10 times 5 times
Required:
a. What is the swap ratio based on current market prices?
b. What is the EPS of Mani Ltd. after the acquisition?
c. What is the expected market price per share of Mani Ltd. after the acquisition, assuming its
P/E ratio is adversely affected by 10%?
d. Determine the market value of the merged Co.
e. Value of original shareholders
f. Calculate gain/loss for the shareholders of the two independent entities, due to the merger.
g. What is the impact on the wealth of the shareholders?
h. What is NPV of the merger to Mani Ltd?
i. What is cost of the merger to Mani Ltd?
Solution:
(a) Swap ratio based on MPS:
Mani Ratnam
EPS 2000 4000
= ₹ 10 =₹4
200 1000
116
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

MPS ₹ 10  10 times = ₹ 100 ₹ 4  5 times = ₹ 20

Swap Ratio based on MPS = 20 = 0.20

100
2,000 + 4,000
(b) Post-merger EPS =
200 + 1,000 × 0.2
= 15
(c) Expected MP after Acquisition = Post-merger EPS  Post-merger PE
= 15  9 = 135
(d) Market Value = 135  400
= 54,000 lakhs
(e) Value of original shareholders = 135  200
= 27,000 lakhs
(f) Gain-loss to the shareholders (in ₹ lakhs):
Equivalent MPS = 135  0.2 = 27
Mani Ltd. Ratnam Ltd.
Post-merger MPS or Equivalent MPS 135 27
Less: Pre-merger MPS 100 20
Gain / (Loss) per share 35 7
 No. of shares 200 1,000
Total gain / (loss) 7,000 7,000
(g) Same as (f)
(h) Same as (f)
(i) Same as (f)

QUESTION 12:
N 19

ABC Ltd. is a company operating in the software industry. It is considering the acquisition of XYZ
Ltd. which is also into software industry. The following information are available for the
companies:
ABC Ltd XYZ Ltd
Earnings after tax (₹) 9,00,000 2,40,000
Number of equity shares 1,50,000 60,000
P/E ratio (no. of times) 14 10

117
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

ABC Ltd. is planning to offer a premium of 25% over the market price of XYZ Ltd. Required:
a. What is the swap ratio based on current market price?
b. Find the number of shares to be issued by ABC Ltd. to the shareholders of XYZ Ltd.
c. Compute the new EPS of ABC Ltd. after merger and comment on the impact of merger.
d. Determine the market price of the share when P/E ratio remains unchanged.
e. Compute the market price when P/E declines to 12 and comment on the results.
Figures are to be rounded off to 2 decimals.
Solution:
a) Swap ratio based on current market price
Particulars ABC Ltd. XYZ Ltd.
EAT ₹ 9,00,000 ₹ 2,40,000
No. of Equity Shares 1,50,000 60,000
EPS ₹6 ₹4
PE Ratio 14 10
Market Price Per Share ₹ 84 ₹ 40
40 × (1 + 0.25)
Swap Ratio = = 25:42 or 0.60
84
b) No. of shares to be issued = 60,000  0.60
= 36,000
9,00,000 + 2,40,000
c) Post-merger EPS =
1,50,000 + 36,000
= 6.13
Impact of merger on earnings:
Equivalent EPS of XYZ Ltd = 6.13  0.6 = 3.68
ABC XYZ
Post-merger EPS & Equivalent EPS 6.13 3.68
Less: Pre-merger EPS 6 4
Gain/(loss) per share 0.13 - 0.32
d) Post-merger MPS when PE Ratio remains same = ₹ 6.13  14 times
= 85.82
e) Post-merger MPS when PE Ratio falls to 12 = ₹ 6.13  12 times
= 73.56
Comments: With the change in PE Ratio from 14 to 12 merger, MPS of ABC ltd will decline
from 85.96 to 73.68.

118
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

QUESTION 13:
N 20

B Ltd. wants to acquire S Ltd. and has offered a swap ratio of 2:3 (2 shares for every 3 share of S
Ltd.) Following information is available:
Particulars B Ltd. S Ltd.
Profit after tax (in ₹) 21,00,000 4,50,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (in ₹) 3.5 2.5
PE Ratio 10 times 7 times
Price quoting per share on BSE before
35 17.5
the merger announcement
Required:
a. The number of equity shares to be issued by' B Ltd. acquisition of S Ltd.
b. What is the EPS of B Ltd. after the acquisition?
c. Determine the equivalent earnings per share of S Ltd. and calculate per share gain or loss to
shareholders S Ltd.
d. What is the expected market price per share of B Ltd. after the acquisition, assuming its PE
multiple remains unchanged?
e. Determine the market value of the merged firm.
f. After the announcement of merger, price of shares of S Ltd. rose by 10% on BSE. Mr. X, an
investor, having 10,000 shares of S Ltd. is having another investment opportunity, which yields
annual return of 14% is seeking your advise whether he needs to offload the shares in the
market or accept the shares from B Ltd.
Solution:

(a) No. of shares to be issued = 1,80,000  2 = 1,20,000

3
21,00,000 + 4,50,000
(b) Post-merger EPS =
6,00,000 + 1,20,000
= 3.54

(c) Equivalent EPS = 3.54  2 = 2.36

3
Gain / (Loss) to the shareholders:
S Ltd
Equivalent EPS 2.36
Less: Pre-merger EPS 2.50
119
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Gain/(loss) per share - 0.14

(d) Post-merger MPS = 3.54  10
= 35.4
(e) MV of merger firm = 35.4  7,20,000
= 2,54,88,000
(f) Calculating annual return after merger:
Equivalent EPS of S Ltd. ₹ 2.36
BSE Price after merger announcement ₹ 19.25
2.36
Return on Market Price per share = 12.26%
19.25
As Mr. X is having another opportunity to earn 14% and expected return on S Ltd.’s share
is 12.26%, it is advisable to offload in market.

QUESTION 14:
MTP M 21

C Ltd. and P Ltd. both companies operating in the same industry decided to merge and form a new
entity S Ltd. The relevant financial details of the two companies prior to merger announcement
are as follows:
C Ltd. P Ltd.
Annual Earnings after Tax (Rs. lakh) 10000 5800
No. Shares Outstanding (lakh) 4000 1000
PE Ratio (No. of Times) 8 10
The merger will be affected by means of stock swap (exchange) of 3 shares of C Ltd. for 1 share of
P Ltd.
After the merger it is expected that due to synergy effects, Annual Earnings (Post Tax) are expected
to be 8% higher than sum of the earnings of the two companies individually. Further, it is expected
that P/E Ratio of S Ltd. shall be average of P/E Ratios of two companies before the merger.
Evaluate the extent to which shareholders of P Ltd. will be benefitted per share from the proposed
merger.
Solution:
The Earnings of S Ltd.
₹ lakh
Earnings of C Ltd. 10,000
Earnings of P Ltd. 5,800
15,800
120
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Earnings of S Ltd. (15,800  1.08) 17,064

Market Value of S Ltd.
₹ lakh
Earnings of S Ltd. 17,064
Average P/E Ratio (10+8)/2 9
Market Value of S Ltd. 1,53,576
No. of shares in S Ltd.
No. of shares of C Ltd. 4000
No. of shares issued to shareholders of P Ltd. 3000
Total No. of shares of C Ltd. 7000
Gain to Shareholders of P Ltd.
Value of Shareholders of P Ltd. in S Ltd. (3,000/7,000)  1,53,576 ₹ 65,818.29
Market Value of P Ltd. before merger (5,800  10) ₹ 58,000.00
Gains to Shareholders ₹ 7,818.29
No. of Shares (before merger) 1000
Gain Per Share ₹ 7.82

QUESTION 15:
MTP M 20

X Ltd. is studying the possible acquisition of Y Ltd. by way of merger. The following data are
available in respect of both the companies.
Particulars X Ltd Y Ltd
Market Capitalization (Rs.) 75,00,000 90,00,000
Gross Profit Ratio 20% 20%
Inventory Turnover Ratio 5 times 4 times
Debtor Turnover Ratio 3 times 5 times
12% Debenture (Rs.) 10,00,000 -
10% Debenture (Rs.) - 14,40,000
No. of Equity Shares 1,00,000 60,000
Operating Expenses 86% 78%
Corporate Tax Rate 30% 30%
Closing Stock (Rs.) 15,00,000 5,00,000
Debtors (Rs.) 10,00,000 8,00,000
You are required to calculate:

121
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

a. Swap ratio based on EPS & MPS respectively as weightage of 40% and 60%.
b. Post-merger EPS
c. Post-merger market price assuming same PE Ratio of X Ltd.
d. Post-merger gain or loss in EPS.
Solution:
Working Notes:
X Ltd. Y Ltd.
Calculating COGS: COGS COGS
5= 4=
COGS 15,00,000 500,000
Inventory T/O Ratio: [ ] COGS = 75,00,000 COGS = 20,00,000
Average Inventory
Gross Profit Ratio 20% 20%
Sales 75,00,000 20,00,000
= =
80% 80%
93,75,000 25,00,000
Less: Operating Expenses @ 86% = 80,62,500 @ 78% = 19,50,000
EBIT 13,12,500 5,50,000
Less: Interest 1,20,000 1,44,000
EBT 11,92,500 4,06,000
Less: Tax Rate @ 30% 357750 121800
EAT 8,34,750 2,84,200
÷ No. of Shares 1,00,000 60,000
EPS 8.35 4.74

Market Capitalization 75,00,000 90,00,000

MPS = = ₹ 75 = ₹ 150
No of shares 1,00,000 60,000

a) Swap ratio based on EPS & MPS

ER based on: W ER  W
EPS 4.74/8.35 = 0.5677 0.4 0.2271
MPS 150/75 = 2 0.6 1.2
ER = 1.4271
8,34,750 + 2,84,200
(b) Post-merger EPS =
1,00,000 + 60,000 × 1.4271
= ₹ 6.03

122
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

75
(c) Pre-merger PE Ratio of X Ltd. = = 8.98
8.35
Post-merger-MPS = 6.03  8.98
= ₹ 54.15
(d) Post-merger Gain/Loss in EPS
Equivalent EPS = 6.03  1.4271 = 8.61
X Ltd. Y Ltd.
Post-merger EPS 6.03 8.61
Pre-merger EPS -8.35 -4.74
Gain/Loss -2.32 3.87

QUESTION 16:
M 06 | RTP

Reliable Industries Ltd. (RIL) is considering a takeover if Sunflower Industries Ltd. (SIL). The
particulars of 2 companies are given below:
Particulars Reliable Industries Ltd. Sunflower Industries Ltd.
Earnings After Tax (EAT) ₹ 20,00,000 ₹ 10,00,000
Equity Shares O/s 10,00,000 10,00,000
Earnings per share (EPS) 2 1
PE Ratio 10 5
Required:
a. What is the market value of each Company before merger?
b. Assume 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 per share? Are the shareholders of RIL
better or worse off than they were before the merger?
c. Due to Synergic effects, the management of RIL estimates that the earnings will increase by
20%. What are the new post-merger EPS and Price per share? Will the shareholders be better
off than before the merger?
Solution:
a) MV of each Company before merger:
Reliable Industries Sunflower Industries
Market Value ₹ 20,00,000  10 = ₹ 2,00,00,000 ₹ 10,00,000  5 = ₹ 50,00,000
b) Post-merger MV of RIL = (20,00,000 + ₹ 10,00,000)  10
= ₹ 3,00,00,000

123
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

3,00,00,000
Post-merger MPS =
10,00,000 + 10,00,000 × 0.25
= 24
Gain/(loss) of shareholder in terms of MPS:
Equivalent MPS: = 24  0.25 = 6
Reliable Sunflower
Post-merger MPS / Equivalent MPS 24 6
Less: Premerger MPS 10  2 = 20 15=5
Gain/(Loss) per share 4 1
 No. of shares 10,00,000 10,00,000
Total Gain/(Loss) 40,00,000 10,00,000
Shareholders will be better-off than before the merger situation.
(20,00,000 + 10,00,000) + 20%
(iii) Post-merger EPS =
10,00,000 + 10,00,000 × 0.25
= 2.88
Post-merger MPS = 2.88  10 = 28.8
Gain/(loss) to shareholders in terms of MPS:
Equivalent MPS: = 28.8  0.25 = 7.2
Reliable Sunflower
Post-merger MPS / Equivalent MPS 28.8 7.2
Less: Premerger MPS 20 5
Gain/(Loss) per share 8.8 2.2
 No. of shares 10,00,000 10,00,000
Total Gain/(Loss) 88,00,000 22,00,000
Shareholders will be better-off than before the merger situation.

QUESTION 17:
N 23 | M 11 | M 09 | N 20 | N 15 | M 05 | RTP

The following information relating to the acquiring Company Abhiman Ltd. and the target
Company Abhishek Ltd. are available. Both the Companies are promoted by Multinational
Company, Trident Ltd. The promoter’s holding is 50% and 60% respectively in Abhiman Ltd. and
Abhishek Ltd.:
Abhiman Ltd. Abhishek Ltd.
Share Capital (₹) 200 Lakh 100 Lakh
124
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Free Reserve and Surplus (₹) 800 Lakh 500 Lakh

Paid up Value per Share (₹) 100 10
Free float market Capitalisation (₹) 400 lakhs 128 lakhs
P/E Ratio (Times) 10 4
Trident Ltd. is interest to do justice to the shareholders of both the Companies. For the swap ratio
weights are assigned to different parameters by the Board of Directors as follows:
Book Value 25%
EPS 50%
Market Price 25%
a. What is the swap ratio based on above weights?
b. What is the Book Value, EPS and expected Market Price of Abhiman Ltd. after acquisition of
Abhishek Ltd. (assuming P.E. ratio of Abhiman Ltd. remains unchanged and all assets and
liabilities of Abhishek Ltd. are taken over at book value)
c. Calculate:
(i) Promoter’s revised holding in the Abhiman Ltd.
(ii) Free float market capitalization.
(iii) Also calculate No. of shares, earning per Share (EPS) and Book Value (B.V.), if after
acquisition of Abhishek Ltd., Abhiman Ltd. decided to:
(a) Issue Bonus shares in the ratio of 1 : 2; and
(b) Split the stock (share) as ₹ 5 each fully paid.
Solution:
Working Notes: Calculation of book value, EPS and Market Price:
Particulars Abhiman Abhishek
(a) Equity SHF 200+800 = 1,000 Lakh (100+500) = 600 Lakhs
Share Capital
(b) No. of shares = 200/100 = 2 Lakhs 100/10 = 10 Lakhs
Paid up value
(c) BVPS (a  b) 500 60
(d) Promoter’s Holding 50% 60%
(e) Free Float Market Cap 400 Lakhs 128 Lakhs
(f) Public Holding (1-d) 50% 40%
(g) Total Market Cap 800 Lakhs 320 Lakhs
(h) MPS (g  b) 400 32
(i) PE Ratio 10 4
(j) EPS 40 8
a) Calculation of swap Ratio
Parameter ER Weight ER  W
125
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

BVPS 60/500 = 0.12 25% 0.03

EPS 8/40 = 0.2 50% 0.1
MPS 32/400=0.08 25% 0.02
0.15
(b) Post-merger no. of Shares = 2,00,000 + 10,00,000  0.15 = 3,50,000
800 + 200 + 100 + 500
Post-merger BVPS = = 457.14
3.5
Post-merger Earning = 40  2 + 10  8 = 160
160
Post-merger EPS = = 45.714
3.5
Post-merger MPS = 45.71  10 = 457.1
(c) (i) Promoter’s Revised holding
No. of shares of Abhiman issued to promoters:
Abhiman 50% 2,00,000  50% = 1,00,000
Abhishek 60% 10,00,000  60%  0.15 = 90,000
1,90,000
1,90,000
Promoter’s Holding in Abhiman = = 54.29%
3,50,000
(ii) Free float number of shares = 3,50,000 – 1,90,000 = 1,60,000
Free Float Market Cap = 1,60,000  457.1 = 73,136,000
(iii) Pre-bonus no of shares = 3,50,000
Bonus shares issued = 3,50,000  ½ = 1,75,000
Post Bonus no of shares = 5,25,000
 Split Ratio = 100/5 = 20
No. of shares = 1,05,00000
1,60,00,000
EPS = = 1.524
1,05,00,000
16,00,00,000
BVPS = = 15.24
1,05,00,000

QUESTION 18:
M 18 | M 17 | M 15

126
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

During the audit of the Weak Bank (W), RBI has suggested that the Bank should either merge
with another bank or may close down. Strong Bank (S) has submitted a proposal of merger of
Weak Bank with itself. The relevant information and Balance Sheets of both the companies are
as under:
Particulars Weak Bank (W) Strong Bank (S) Assigned Weights (%)
Gross NPA (%) 40 5 30
Capital Adequacy Ratio (CAR) 5 16 28
(Total Capital/Risk Weight Asset)
Market price per Share (MPS) 12 96 32
Book value 10
Trading on Stock Exchange Irregular Frequent
Balance Sheet (₹ in Lakhs)
Particulars Weak Bank (W) Strong Bank (S)
Paid up Share Capital (₹10 per share) 150 500
Reserves & Surplus 80 5,500
Deposits 4,000 44,000
Other Liabilities 890 2,500
Total Liabilities 5,120 52,500
Cash in Hand &with RBI 400 2,500
Balance with Other Banks - 2,000
Investments 1,100 19,000
Advances 3,500 27,000
Other Assets 70 2,000
Preliminary Expenses 50 -
Total Assets 5,120 52,500
You are required to
a. Calculate Swap ratio based on the above weights:
b. As certain the number of Shares to be issued to Weak Bank;
c. Prepare Balance Sheet after merger; and
d. Calculate CAR and Gross NPA of Strong Bank after merger.
Solution:
(a) Calculation of Book Value Per Share
Particulars Weak Bank (W) Strong Bank (S)
Share Capital (₹ Lakhs) 150 500
Reserves & Surplus (₹ Lakhs) 80 5,500

127
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

230 6,000
Less: Preliminary Expenses (₹ Lakhs) (50) -
Net Worth or Book Value (₹ Lakhs) 180 6,000
÷ No. of Outstanding Shares (Lakhs) 15 50
Book Value Per Share (₹) 12 120
Calculation of Swap Ratio
Strong Weak ER Weight ER  W
Gross NPA 5 40 0.125 0.30 0.0375
Capital Adequacy Ratio 16 5 0.3125 0.28 0.0875
MPS 96 12 0.125 0.32 0.04
BVPS 120 12 0.1 0.1 0.01
ER 0.175
For every share of Weak Bank, 0.1750 share of Strong Bank shall be issued
(b) No. of shares to be issued to weak = 15  0.175 = 2.625 lakh shares
(c) Balance Sheet after merger:
Liabilities Amount Assets Amount
Paid up Share Capital 526.25 Cash in hand 2,900
Reserve & Surplus 5500.00 Balance 2,000
Capital Reserve 153.75 Investment 20,100
Deposits 48000.00 Advances 30,500
Other Liabilities 3390.00 Other Assets 2,070

57570.00 57570.00

(d) Calculation CAR & Gross NPA % of Bank ‘S’ after merger
Total Capital
CAR/CRWAR =
Risky Weighted Assets
Weak Bank Strong Bank Merged
5% 16%
Net Total Capital ₹ 180 lac ₹ 6000 lac ₹ 6180 lac
Risky Weighted Assets ₹ 3600 lac ₹ 37500 lac ₹ 41100 lac
6,180
CAR =  100 = 15.04%
41,100

128
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Gross NPA
Gross NPA Ratio = x 100
Gross Advances
Weak Bank Strong Bank Merged
Gross NPA Ratio (%) 0.40 0.05
Gross Advances (₹) ₹ 3,500 lac ₹ 27,000 lacs ₹ 30,500 lacs
Gross NPA (₹) ₹ 1400 lac ₹ 1350 lac ₹ 2750 lac
2,750
Gross NPA Ratio =  100 = 9.02%
30 ,500

QUESTION 19:
N 20 | M 15 | N 08

BA Ltd. and DA Ltd. both the companies operate in the same industry. The financial statements of
both the companies for the current financial year are as follows:
Balance Sheet BA Ltd. (₹) DA Ltd. (₹)
Current assets 14,00,000 10,00,000
Fixed Assets (Net) 10,00,000 5,00,000
Total (₹) 24,00,000 15,00,000
Equity capital (₹ 10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 -
14% Long –term debt 5,00,000 3,00,000
Current Liabilities 7,00,000 4,00,000
Total (₹) 24,00,000 15,00,000
Income Statement BA Ltd. (₹) DA 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:
No. of Equity Shares 1,00,000 80,000
Dividend payment ratio (D/P) 40% 60%
Market price per share ₹ 40 ₹ 15

129
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Assume that both companies are in the process of negotiating a merger through an exchange of
equity shares. You have been asked to assist in establishing equitable exchange terms and are
required to:
a. Decompose the share price of both the companies into EPS and P/E components; and also
segregate their EPS figures into Return on Equity (ROE) and book value/intrinsic value per
share components.
b. Estimate future EPS growth rates for each company.
c. Based on expected operating synergies BA Ltd. estimates that the intrinsic value of DA’s equity
share would be ₹ 20 per share on its acquisition. You are required to develop a range of
justifiable equity share exchange ratios that can be offered by BA Ltd. to the shareholders of
DA Ltd. Based on your analysis in part (i) and (ii), would you expect the negotiated terms to be
closer to the upper, or the lower exchange ratio limits and why?
d. Calculate the post-merger EPS based on an exchange ratio of 0.4:1 being offered by BA Ltd.
and indicate the immediate EPS accretion or dilution, if any that will occur for each group of
shareholders.
e. Based on a 0.4: 1 exchange ratio and assuming that BA Ltd.’s pre-merger P/E ratio will continue
after the merger, estimate the post-merger market price. Also show the resulting accretion or
dilution in pre-merger market prices.
Solution:
a) Decomposition of share price into EPS and P/E:
Particulars BA Ltd. DA Ltd.
Market Price 40 15

EAES 2,10,000 99,000

EPS = = 2.1 = 1.2375
n 1,00,000 80,000
MPS 40 15
PE Ratio = = 19.047 = 12.12
EPS 2.1 1.2375
ESHF
BVPS= 12,00,000/1,00,000 = 12 8,00,000/80,000 = 10
No. of Shares
EPS 2.1 1.2375
ROE = = 17.5% = 12.375%
BVPS 12 10
b) Future EPS growth rates
Growth Rate 10.5% 4.95%
(RR  ROE) (0.60  0.175) (0.40  0.12375)

(c) Upper limit of ratio = 20 = 0.50

40
130
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Lower limit of ratio = 15 = 0.375

40
Since ROE and growth rate of the acquirer are higher. Therefore, the negotiated terms will
be close to the lower exchange ratio that is 0.375
2,10,000 + 99,000
(d) Post-merger EPS =
1,00,000 + 80,000 × 0.40
= 2.341
EPS accretion & dilution:
Equivalent EPS = 2.341  0.4 = 0.9364
Particulars BA Ltd. DA Ltd.
Post-merger EPS / Equivalent MPS 2.341 0.9364
Less: Pre-merger EPS -2.1 -1.2375
Gain/(loss) per share 0.241 -0.3011
(e) Post-merger MPS = Post-merger EPS  Post-merger PE Ratio
= 2.341  19.047
= 44.59
MPS accretion & dilution:
Equivalent MPS = 44.59  0.4 = 17.836
Particulars BA Ltd. DA Ltd.
Post-merger MPS / Equivalent MPS 44.59 17.836
Less: Pre-merger MPS 40 15
Gain/(loss) per share 4.59 2.836

QUESTION 20:
N 18

C Ltd & D Ltd are contemplating a Merger deal in which C Ltd. will acquire D Ltd. The relevant
information about the firms is:
C Ltd D Ltd
Total Earnings (E) (In Millions) ₹ 96 ₹ 30
Number of Outstanding Shares (S) (In Millions) 20 14
Earnings Per Share (EPS) (₹) 4.8 2.143
Price Earnings Ratio (P/E) 8 7
Market Price Per Share (P) (₹) 38.4 15

131
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

a. What is the Maximum Exchange Ratio acceptable to the Shareholders of C Ltd., if the P/E Ratio
of the Combined Firm is 7?
b. What is the Minimum Exchange Ratio acceptable to the Shareholders of D Ltd., if the P/E Ratio
of the Combined is 9?
Solution:
(a) Maximum exchange ratio acceptable to the shareholders of C Ltd:
Post-merger MPS = Pre-merger MPS
96 + 30
[20 + 14 × ER]  7 = 38.4
ER = 0.212
(b) Minimum exchange ratio acceptable to the shareholders of D Ltd:
(96 + 30) × 9
[20 + 14 × ER ] ER = 15
ER = 0.325

QUESTION 21:
RTP M 11

The market value of two companies Sun Ltd. and Moon Ltd. are ₹175 lac and ₹75 lac respectively.
The share capital of Sun Ltd. consists of 3.5 lac ₹ 10/- ordinary shares and that of Moon Ltd. consist
of 2.2 lac ordinary shares of ₹ 10/- each.
Sun Ltd. is proposing to takeover Moon Ltd. The pre-merger earnings are ₹19 lac for Sun Ltd. and
₹ 10 lac for Moon Ltd. The merger is expected to result into a synergy gain of ₹ 4 lacs in the form
of Post tax cost savings. The Pre-merger P/E Ratios are 10 for Sun Ltd. and 8 for Moon Ltd. The
possible combined P/E Ratios are 9 and 10.
You are required to calculate.
a. Minimum combined P/E ratio to justify the merger.
b. Exchange ratio of shares if combined P/E ratio is 9.
c. Exchange ratio of shares if combined P/E ratio is 10.
Solution:
Self-note: In the absence of exchange ratio, ICAI has assumed it to be 1:1. Logically, I was supposed
to be assumed based on MPS. But, specifically for this question, we are supposed to remember this.
19 Lac + 10 Lac + 4 Lac
a) Post-merger EPS =
3.5 Lac + 2.2 Lac
= Rs.5.79

132
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Rs 175 lac
Pre-merger MPS = = Rs.50 per share
3.5 lac
Justified PE ratio for post-merger MPS to be equal to pre-merger MPS:
Rs 50
Post merger PE ratio = = 8.64 times
Rs. 5.79
b) Exchange ratio of shares if combined P/E ratio is 9:
Rs.33 lac × 9
= 50
3.5 lac + 2.2 lacs × ER
ER = 1.1091
c) Exchange ratio of shares if combined P/E ratio is 10:
Rs.33 lac × 10
= 50
3.5 lac + 2.2 lacs × ER
ER = 1.4091

QUESTION 22:
N 21 | N 15 | RTP

XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC Ltd.
Relevant financial data are as follows:
Equity Shares outstanding (Nos.) 10,00,000 4,00,000
EPS ₹ 40 ₹ 28
Market Price per share ₹ 250 ₹ 160
a. Illustrate the impact of merger on EPS of both the companies.
b. The management of ABC Ltd. has quoted a share exchange ratio of 1:1 for the merger.
Assuming that P/E ratio of XYZ Ltd. will remain unchanged after the merger, what will be the
gain from merger for ABC Ltd.?
c. What will be the gain/loss to shareholders of XYZ Ltd.?
d. Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd.
Solution:
Swap Ratio = 0.70
XYZ Ltd. ABC Ltd.
Equity shares outstanding (Nos.) 10,00,000 4,00,000
EPS ₹ 40 ₹ 28
Profit ₹ 4,00,00,000 ₹ 1,12,00,000
PE Ratio 6.25 5.71
Market price per share ₹ 250 ₹ 160
133
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

4,00,00,000 + 1,12,00,000
a) Post-merger EPS =
10,00,000 + 4,00,000 × 0.70
= ₹ 40
Gain/(loss) on shareholders in EPS:
Equivalent EPS = 40  0.7 = 28
Particulars XYZ Ltd. ABC Ltd.
Post-merger EPS / Equivalent EPS 40 28
Less: Pre-merger EPS 40 28
Gain/(loss) per share 0 0
b) If Share exchange ratio = 1:1
4,00,00,000 + 1,12,00,000
Per merger EPS =
10,00,000 + 4,00,000 × 1
= 36.57
Post-merger MPS = 36.57  6.25
= 228.56
Gain from merger to the shareholders of ABC:
Equivalent MPS = 228.56  6.25 = 228.56
ABC Ltd
Equivalent MPS 228.56
Less: Premerger MPS 160
Gain/(Loss) per share 68.56
 No. of shares 10,00,000
Total Gain/(Loss) 6,85,60,000
c) Gain from merger to the shareholders of XYX:
ABC Ltd
Post-merger MPS 228.56
Less: Premerger MPS 250
Gain/(Loss) per share 21.44
 No. of shares 4,00,000
Total Gain/(Loss) 85,76,000
d) maximum exchange ratio acceptable to shareholders of XYZ Ltd:
(4,00,00,000 + 1,12,00,000) × 6.25
= 250
10,00,000 + 4,00,000 × ER
ER = 0.70
134
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Thus, maximum acceptable ratio shall be 0.70 share of XYZ Ltd. for one share of ABC Ltd.

QUESTION 23:
RTP M 12

AXE Ltd. is interested to acquire PB Ltd. AXE has 50,00,000 shares of ₹ 10 each, which are presently
being quoted at ₹ 25 per share. On the other hand, PB has 20,00,000 shares of ₹ 10 each currently
selling at ₹ 17. AXE and PB have EPS of ₹ 3.20 and ₹ 2.40 respectively.
You are required to:
a) Show the impact of merger on EPS, in case if exchange ratio is based on relative proportion of
EPS.
b) Suppose, if AXE quote an offer of share exchange ratio of 1:1, then should PB accept the offer
or not, assuming that there will be no change in PE ratio of AXE after the merger.
c) The maximum ratio likely to acceptable to management of AXE.
Solution:
2.40
a) Exchange Ratio based on EPS = = 0.75
3.20
Earning of AXE Ltd. = 3.20  50,00,000 = ₹ 1,60,00,000
Earning of PB Ltd. = 2.40  20,00,000 = ₹ 48,00,000
1,60,00,000 + 48,00,000
Post-merger EPS = = ₹ 3.20
50,00,000 + 20,00,000 × 0.75
Statement showing impact on EPS
AXE Ltd. PB Ltd.
Post-merger EPS / Equivalent EPS 3.20 2.40
Less: Pre-merger EPS 3.20 2.40
Thus, there is will be no change in EPS for shareholder of both companies
25
(b) Pre-merger PE of AXE Ltd. = = 7.8125
3.2
(1,60,00,000 + 48,00,000) × 7.8125
Post-merger MPS = = 23.21
50,00,000 + 20,00,000 × 1
Equivalent MPS = 23.21  1 = 23.21
Pre-merger MPS = 17
Thus PB Ltd. should accept the offer.
(c) Maximum share ratio acceptable to AXE Ltd.
Post-merger MPS = Pre-merger MPS

135
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

(1,60,00,000 + 48,00,000) × 7.8125

= 25
50,00,000 + 20,00,000 × ER
ER = 0.75
Thus, the maximum exchange ratio acceptable to shareholders of AXE Ltd. is 0.75 shares
for every share of PB Ltd.

QUESTION 24:
Self-added for class students

Consider the following information pertaining to two companies: (in ₹ ‘000)

BT Ltd W Ltd
Total Earnings ₹ 9000 ₹ 1800
Number of Outstanding Shares 3000 1500
Price Earnings Ratio (times) 6 4
BT Ltd wished to takeover W Ltd. BT Ltd is confident that, by managing business of T Ltd more
efficiently, they could achieve a permanent savings in administration and marketing cost to the
tune of ₹ 50,000 annually. They are considering a cash offer of ₹ 5 per share.
a. What would be cost of merger
b. What will NPV of the merger.
Solution:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________

136
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

QUESTION 25:
M 19

Given is the following information:

Day Ltd. Night Ltd.
Net Earnings ₹ 5 crores ₹ 3.50 crores
No. of Equity Shares 10,00,000 7,00,000
The shares of Day Ltd. and Night Ltd. trade at 20 and 15 times their respective P/E ratios.
Day Ltd. considers taking over Night Ltd. by paying ₹ 55 crores considering that the market price
of Night Ltd. reflects its true value. It is considering both the following options:
a. Takeover is funded entirely in cash.
b. Takeover is funded entirely in stock.
You are required to calculate the cost of the takeover and advise Day Ltd. on the best alternative.
Solution:
Working Notes:
Day Ltd Night Ltd
Net Earnings ₹ 5 crores ₹ 3.5 crores
No. of Equity Shares 10,00,000 7,00,000
EPS 50 50
P/E 20 times 15 Times
MPS ₹ 1000 ₹ 750
Market Value 1,00,00,00,000 52,50,00,000
a) If takeover is funded by Cash:
Since Market Price of Night Ltd. reflects its full value, cost of takeover to Day Ltd is:
Particulars Amount
Cash Paid to Night Ltd. 55 Cr.
Less: Premerger MV or night (3.50  15) -52.5 Cr.
2.50 Cr.
55,00 ,00 ,000
(ii) Calculation of no. of shares to be issued = = 5,50,000 shares
1,000
Post-merger MV* = 1,00,00,00,000 + 52,50,00,000
= 1,52,50,00,000
5,50,000
Share of Night Ltd in Post-merger MV = 1,52,50,00,000 
10,00,000 + 5,50,000
= 54,11,29,032
137
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Cost of Takeover = 54,11,29,032 – 52,50,00,000#

= 1,61,29,032
Best Alternative: Since true cost is lower in case of funding from stock, Day Ltd. would better off
by funding the takeover by stock.
* Self-note: While calculating the post-merger MV under stock option, no synergy in value has been
considered because in the suggested answers pre-merger MVs have been simply added. This is
particularly in this question because we need to compare gain of target company in case of the
stock deal with the gain of cash deal. Since no synergy is considered in case of cash deal, therefore
it can not be considered even in stock deal. Remember this!
#
Self-note: While calculating the cost of takeover under stock option, suggested answer has
deducted 55 Crores & not pre-merger MV of 52.5 Cr.

138
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

2. When question specifies post-merger MV or amount of synergy

in value or way to calculate these.
QUESTION 26:
N 21 | N 14

Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior
to the merger announcement are:
Particulars Doom Ltd. Elrond Ltd.
Market price per share ₹ 25 ₹ 50
Number of outstanding shares 10 lakhs 20 lakhs
The merger is expected to generate gains, which have a present value of ₹ 200 lakhs. The exchange
ratio agreed to is 0.5.
What is the true cost of the takeover & NPV of the merger from the point of view of Elrond Ltd?
Solution:
Shares to be issued to the shareholders of Doom = 10 lakhs  0.5
= 5 lakhs
Post-merger MV of Elrond = ₹ 50  20 lakh + ₹ 25  10 lakh + ₹ 200 lakh
= ₹ 1450 lakh
The cost of merger:
Particulars Amount
5,00,000
Equivalent MV [1450  ] 290 Lakhs
20,00,000 + 5,00,000
Less: Premerger MV or night (25  10 lakhs) 250 Lakhs
40 Lakhs

QUESTION 27:
M 21

Long Ltd., is planning to acquire Tall Ltd., with the following data available for both the companies:
Long Ltd Tall Ltd
Expected EPS ₹ 12 ₹5
Expected DPS ₹ 10 ₹3
No. of Shares 30,00,000 18,00,000
Current Market Price of Share ₹ 180 ₹ 50

139
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

As per an estimate Tall Ltd., is expected to have steady growth of earnings and dividends to the
tune of 6% per annum. However, under the new management the growth rate is likely to be
enhanced to 8% per annum without additional investment.
You are required to:
a. Calculate the net cost of acquisition by Long Ltd., if ₹ 60 is paid for each share of Tall Ltd.
b. If the agreed exchange ratio is one share of Long Ltd., for every three shares of Tall Ltd., in lieu
of the cash acquisition as per (i) above, what will be the net cost of acquisition?
c. Calculate Gain from acquisition.
Solution:
a) Net cost of acquisition shall be computed as follows:
Cash paid for the shares of Tall Ltd. (₹ 60  18,00,000) ₹ 10,80,00,000
Less: Pre-merger Value of Tall Ltd. (₹ 50  18,00,000) ₹ 9,00,00,000
Net Cost of acquisition of Tall Ltd. ₹ 1,80,00,000
(ii) Net Cost of acquisition in case of exchange of shares:
D1
Calculation of cost of Equity of Tall Ltd. = +g
P0
3
= + 0.06 = 12%
50
Growth rate after acquisition = 8%
3
Value of Tall Ltd. after merger = = 75
0.12 - 0.08
180  30,00,000 + 75  18,00,000
Post-merger MPS =
36,00,000
= ₹ 187.50 per share
Equivalent MPS = 187.50  1/3 = ₹ 62.5
Net cost of acquisition:
Particulars Amount
Equivalent MPS of Tall Ltd 62.5
Less: Pre-merger MPS of Tall Ltd 50.0
Per share gain 12.5
 Pre-merger n 18,00,000
Total Gain 2,25,00,000
c) Calculation of gain from acquisition:
Post-merger MV of Long Ltd.
(180  30,00,000 + ₹ 75  18,00,000) ₹ 67,50,00,000

140
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Less: Pre-merger MV of:

Long Ltd. (₹ 180  30,00,000) ₹ 54,00,00,000
Tall Ltd. (₹ 50  18,00,000) ₹ 9,00,00,000 ₹ 63,00,00,000
Gain from Acquisition ₹ 4,50,00,000
Self-note: Part ‘c’ of the question ask for gain from acquisition. And total gain from
acquisition means total combined gains of both the parties i.e., total synergy in value.

QUESTION 28:
N 12 | RTP

Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are given
below: (₹ in Lakhs)
Year 1 2 3 4 5
Yes Ltd. 175 200 320 340 350
Merged Entity 400 450 525 590 620
Earnings would have witnessed 5% constant growth rate without merger and 6% with merger on
account of economies of operations after 5 years in each case. The cost of capital is 15%.
The number of shares outstanding in both the companies before the merger is the same and the
companies agree to an exchange ratio of 0.5 shares of Yes Ltd. for each share of No ltd.
PV factor at 15% for years 1 – 5 are 0.870, 0.756, 0.658, 0.572, 0.497 respectively.
You are required to:
a. Compute the Value of Yes Ltd. before and after merger.
b. Value of Acquisition and
c. Gain to shareholders of Yes Ltd.
Solution:
a) Computation of value of Yes Ltd:
Before Merger Value of Yes Ltd.
Year Cash Flows PVAF @15% Disc. CF
1 175 0.870 152.25
2 200 0.756 151.2
3 320 0.658 210.56
4 340 0.572 194.48
5 350 0.497 173.95
350 × 1.05
5 = 3675 0.497 1826.48
0.15 - 0.05
2708.92

141
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

After Merger Value of Yes Ltd.

Year Cash Flows PVAF @15% Disc. CF
1 400 0.870 348.00
2 450 0.756 340.20
3 525 0.658 345.45
4 590 0.572 337.48
5 620 0.497 308.14
620 × 1.06
5 = 7302.22 0.497 3,629.20
0.15 - 0.06
5,308.47
b) Value of Acquisition = Value After Merger – Value Before Merger
= 5,308.47 lakhs – 2,708.92 lakhs
= 2,599.55 lakhs
1
c) Post-merger MV owned by SH of Yes Ltd. = 5,308.47  = 3,538.983
1.5
Gain to shareholders of yes Ltd. = 3,538.98 lakhs – 2,708.92 lakhs
= 830.06 lakhs

QUESTION 29:
N 18 | M 10 | RTP

T Ltd. and E Ltd. are in the same industry. The former is in negotiation for acquisition of the latter.
Important information about the two companies as per their latest financial statements is given
below: (₹ Lakhs)
Particulars T Ltd E Ltd
₹ 10 Equity shares outstanding 12 Lakhs 6 Lakhs
Debt:
10% Debentures 580 --
12.5% Institutional Loan -- 240
Earnings before interest, depreciation and tax (EBIDAT) 400.86 115.71
Market Price/Share (₹) 220.00 110.00
T Ltd. plans to offer a price for E Ltd., business as a whole which will be 7 times EBIDAT reduced
by outstanding debt, to be discharged by own shares at market price.
E Ltd. is planning to seek one share in T ltd. for every 2 shares in E ltd. based on the market price.
Tax rate for the two companies may be assumed as 30%.
Calculate and show the following under both alternatives – T Ltd.’s offer and E Ltd.’s plan;

142
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

a. Net Consideration payable.

b. No. of shares to be issued by T ltd.
c. EPS of T Ltd. after acquisition.
d. Expected market price per share of T Ltd. after acquisition.
e. State briefly the advantages to T ltd. from the acquisition.
Calculations (except EPS) may be rounded off to 2 decimals in lakhs.
Solution:
Calculation as per T Ltd.’s Offer:
a) EBITDA 115.71 Lakhs
 EBITDA Multiple 7
Value of Business 809.97 Lakhs
Less: Debt (240 Lakhs)
Net consideration payable 569.97 Lakhs

b) Net Consideration 569.97 Lakhs

 MPS of T Ltd. 220
No. of shares to be issued by T Ltd. 2.59 Lakhs
c) Pre-merger PAT
T Ltd. E Ltd.
EBITDA or EBIT 400.86 115.71
Less: Int @ 10% -58.00 -30.00
EBT 342.86 85.71
Less: Tax @ 30% -102.86 -25.71
EAT 240.00 60.00
240 + 60
Post-merger EPS = = 20.56
12 + 2.59
240 lacs
d) Pre-merger EPS = = 20
12 Lacs
220
Pre-merger PE Ratio = = 11
20
Post-merger MPS = 20.56  11 = 226.16
Calculation as per E Ltd.’s Offer:
a) No. of shares to be issued = 6,00,000  0.50
= 3,00,000

143
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

Consideration Payable = 3,00,000  220

= 6,60,00,000
b) No. of shares to be issued = 3,00,000
240 + 60
c) Post-merger EPS = = 20
12 + 3
d) Expected Post-merger MPS = 20  11 = 220
e) Advantages of Acquisition to T Ltd:
Since the two companies are in the same industry, the following advantages could accrue:
• Synergy, cost reduction and operating efficiency.
• Better market share.
• Avoidance of competition

QUESTION 30:
RTP N 15

Two companies Bull Ltd and Bear Ltd recently have been merged. The merger Initiative has been
taken by Bull Ltd to achieve a lower risk profile for the combined firm in spite of fact that both
Companies belong to different industries and disclose a little co-movement in their profit earning
streams. Though there is likely to synergy benefits to the tune of ₹ 7 Crores from the proposed
merger. Further, both Companies are equity financed and other details are as follows:
Market Capitalization Beta
Bull Ltd ₹ 1,000 Crores 1.5
Bear Ltd ₹ 500 Crores 0.6
Expected Market Return and Risk-free Rate of Return are 13% and 8% respectively. Shares of the
Merged Entity have been distributed in the ratio of 2:1, i.e., Market Capitalization just before
merger.
You are required to
a. Calculate Return on Shares of both Companies before merger and after merger.
b. Calculate the impact of merger on Mr. X, a Shareholder holding 4% Shares in Bull Ltd and 2%
Shares of Bear Ltd.
Solution:
a) Expected Return as per CAPM:
Pre-merger Return of Bull Ltd. = 8 + 1.5 (13 - 8) = 15.5%
Pre-merger Return of Bear Ltd. = 8 + 0.6 (13 - 8) = 11%
Pots-merger return of Bull Ltd.:

144
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

2 1
Weighted Average Beta = 1.5  + 0.6  = 1.2
3 3
Return = 8 + 1.2 (13-8) = 14%
(b) Earning of Bull Ltd = 1,000  15.5% = 155 Cr.
Earning of Bear Ltd = 500  11% = 55 Cr.
Synergy in Earnings = 7 Cr.
Post-merger Earnings
Post-merger MV =
Post-merger Ke
155 Cr. + 55 Cr. + 7 Cr.
= = 1,550 Cr.
0.14
Calculating Post-merger holding of Mr. X:
= 2/3  0.04 + 1/3  0.02
= 0.1/3
Impact of merger on wealth of Mr. X
Amount
Share in Post-merger MV [1,550  0.1/3] 51.67
Less: Share in Pre-merger MV
Bull ltd [1,000  4%] -40.00
Bear ltd [500  2%] -10.00
1.67

QUESTION 31:
M 13

Longitude Limited is in the process of acquiring Latitude Limited on a share exchange basis
Following relevant data are available:
Longitude Limited Latitude Limited
Profit after Tax (PAT) ₹ in Lakhs 120 80
Number of Shares Lakhs 15 16
Earnings per Share (EPS) ₹ 8 5
Price Earnings Ratio (P/E Ratio) 15 10
(Ignore Synergy)
You are required to determine:
(i) Pre-merger Market Value per Share, and
(ii) The maximum exchange ratio Longitude Limited can offer without the dilution of
145
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

a. EPS and
b. Market Value per Share
Calculate Ratios up to four decimal points and amounts and number of shares up to two decimal
points.
Solution:
i) Pre-merger Market Value per Share
Longitude Latitude
MPS = PE  EPS 15  8 = 120 10  5 = 50
Pre-merger MV = MPS  n 120  15 = 1800 50  16 = 800
ii) (a) Maximum Exchange Ratio without dilution of EPS:
Post-merger EPS = Pre-merger EPS
120 + 80
=8
15 + 16 × ER
ER = 0.625
(b) Maximum Exchange Ratio without dilution of MPS:
Post-merger MPS = Pre-merger MPS
1800 + 800
= 120
15 + 16 × ER
ER = 0.4167

QUESTION 32:
M 19 | RTP

R Ltd. and S Ltd. operating in same industry are not experiencing any rapid growth but providing
a steady stream of earnings. R Ltd.'s management is interested in acquisition of S. Ltd. due to its
excess plant capacity. Share of S Ltd. is trading in market at ₹ 3.20 each. Other data relating to S
Ltd. is as follows:
Balance Sheet of S Ltd. (₹)
Liabilities Amount Assets Amount
Current Liabilities 15,980,000 Current Assets 24,875,000
Long Term Liabilities 12,800,000 Other Assets 9,400,000
Reserve & Surplus 27,995,000 Property Plants & Equipment 34,500,000
Share Capital 12,000,000
(80 Lakhs shares of ₹ 1.5 each)
Total 68,775,000 Total 68,775,000

146
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Particulars R Ltd. S Ltd Combined Entity

Profit after Tax 86,50,000 49,72,000 1,21,85,000
Residual Net Cash Flows per year 90,10,000 54,87,000 1,85,00,000
Required return on equity 13.75% 13.05% 12.50%
You are required to compute the following:
a. Minimum price per share S Ltd. should accept from R Ltd.
b. Maximum price per share R Ltd. shall be willing to offer to S Ltd.
c. Floor Value of per share of S Ltd., whether it shall play any role in decision for its acquisition
by R Ltd.
Solution:
(a) Minimum Price per share S Ltd. Should accept R ltd.
Book value per share of S Ltd.
Share capital 1,20,00,000
Reserve and Surplus 2,79,95,000
3,99,95,000
 No. of shares 80,00,000
5
After Tax cash flows
54,87,000
Total value of Business = = 4,20,45,977
0.1305
4,20,45,977
Value per share = = 5.26
80,00,000
 Min. Price per share S Ltd. Should accept from R Ltd. Is ₹ 5 (current book value)
(b) Maximum price per share, R Ltd. shall be willing to offer to S Ltd.
90,10,000
Pre-merger MV of R Ltd. = = 6,55,27,273
0.1375
Calculating Maximum Price per share
Post-merger MV = Pre-merger MV
1,85,00,000
– Cash paid = 6,55,27,273
0.125
Total cash paid = 8,24,72,727
8,24,72,727
Max Cash per share = = 10.31
80,00,000

147
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

(c) Floor value of per share of S Ltd shall be ₹ 3.20 (current market price) and it shall not play
any role in decision for the acquisition of S Ltd. as it is lower than its current book value.

QUESTION 33:

Companies X and Y are in the same business line generating Annual Cash Flows of ₹ 36 Lakhs and
₹ 18 Lakhs respectively. If the two Firms decides to merge together, a post – tax Cost Savings of ₹
6 Lakhs every year is expected to occur. X Ltd. proposes to absorb & Ltd on paying a cash
consideration of ₹ 150 Lakhs.
The cost of Capital is 15%. What are the Merger Gains to be allocated to Shareholders?
Solution:
36,00,000
Pre-merger MV of X Ltd = = 2,40,00,000
0.15
Post-merger Cashflows = 36,00,000 + 18,00,000 + 6,00,000
= 60,00,000
60,00,000
Post-merger MV = – 1,50,00,000
0.15
= 2,50,00,000
Gain to the shareholders = 2,50,00,000 - 2,40,00,000
= 10,00,000

QUESTION 34:
M 07 | RTP

AFC Ltd. wishes to acquire BCD Ltd. The shares issued by the two companies are 10,00,000 and
5,00,000 respectively:
a. Calculate the increase in the total value of BCD Ltd. resulting from the acquisition on the basis
of the following conditions:
Particulars Value
Current Expected Growth Rate of BCD Ltd 7%
Expected Growth Rate under control of AFC Ltd. (Without any additional 8%
capital investment and without any change in risk of operations)
Current Market Price per Share of AFC Ltd. ₹ 100
Current Market Price per Share of BCD Ltd. ₹ 20
Expected Dividend per Share of BCD Ltd ₹ 0.60

148
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

b. On the basis of aforesaid conditions calculate the gain or loss to shareholders of both the
companies, if AFC Ltd. were to offer one of its shares for every four shares of BCD Ltd.
c. Calculate the gain to the shareholders of both the Companies, if AFC Ltd. pays ₹ 22 for each
share of BCD Ltd., assuming the P/E Ratio of AFC Ltd. does not change after the merger. EPS
of AFC Ltd. is ₹ 8 and that of BCD is ₹ 2.50. It is assumed that AFC Ltd. invests its cash to earn
10%.
Solution:
a) Calculation of Ke of BCD ltd using pre-merger growth rate:
D1
Ke = +g
P0
0.6
= + 7 = 10%
20
Post-merger value per share of BCD ltd using post-merger growth rate:
MPS = 0.60
0.10 − 0.08
MPS = 30
Total post-merger value of BCD ltd = 5,00,000  30
= 1,50,00,000
Pre-merger value of BCD Ltd. = 5,00,000  20
= 1,00,00,000
Increase in Value = 1,50,00,000 – 1,00,00,000
= 50,00,000
10,00,000 × 100 + 1,50,00,000
b) Post-merger MPS =
10,00,000 + 5,00,000 × 0.25
= 102.22
Gain / (loss) to the shareholders:
Equivalent MPS = 102.22  0.25 = 25.56
AFC Ltd. BCD Ltd.
Post-merger MPS / Equivalent MPS 102.22 25.56
Less: Pre-merger MPS -100 -20
Gain/(loss) per share 2.22 5.56
 no. of shares 10,00,000 5,00,000
Total Gain/(Loss) 22,20,000 27,80,000

149
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

100
c) Pre-merger PE Ratio of AFC Ltd. = = 12.50
8
8 × 10,00,000 + 2.5 × 5,00,000 - (22 × 5,00,000 × 10%)
Post-merger MPS =  12.5
10,00,000
= 101.875
Gain/loss to shareholders:
AFC Ltd. BCD Ltd.
Post-merger MPS 101.875
Cash Paid 22
Less: Pre-merger MPS -100 -20
Gain/(loss) per share 1.875 2
 no. of shares 10,00,000 5,00,000
Total Gain/(Loss) 18,75,000 10,00,000

QUESTION 35:
M 14

The equity shares of XYZ Ltd. are currently being traded at ₹ 24 per share in the market. XYZ Ltd.
has total 10,00,000 equity shares outstanding in number; and promoters' equity holding in the
company is 40%.
PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The estimated present value of
these synergies is ₹80,00,000.
Further PQR feels that management of XYZ Ltd. has been over paid. With better motivation, lower
salaries and fewer perks for the top management, will lead to savings of ₹4,00,000 p.a. Top
management with their families are promoters of XYZ Ltd. Present value of these savings would
add ₹ 30,00,000 in value to the acquisition.
Following additional information is available regarding PQR Ltd.:
Earnings per Share :₹4
Total Number of Equity Shares Outstanding : 15,00,000
Market Price of Equity Share : ₹ 40
a. What is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.?
b. What is the minimum price per equity share at which the management of XYZ Ltd. will be
willing to offer their controlling interest?
Solution:
a) Maximum price per share at which PQR Ltd. can offer to pay for XYZ Ltd.’s share
Post-merger MPS = Pre-merger MPS of PQR ltd.

150
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

MVPQR + MVXYZ + SV - Cash Paid

= Pre-merger MPS
nA
10,00,000 × 24 + 15,00,000 × 40 + 80,00,000 + 30,00,000 - Cash Paid
= 40
15,00,000
Cash Paid = 3,50,00,000
3,50,00,000
Maximum price per share = = ₹ 35
10,00,000
Self-note: In the absence of information regarding stock vs cash deal, solve questions
assuming cash deal as it makes solving such questions easy.
b) Minimum price per share at which the management of XYZ Ltd.’s will be willing to offer
their controlling interest
Pre-merger value promoters holding (40% of 10,00,000  ₹ 24) ₹ 96,00,000
Add: PV of loss of remuneration to top management ₹ 30,00,000
₹ 1,26,00,000
÷ No. of Shares 4,00,000
Minimum Price ₹ 31.50

QUESTION 36:
RTP M 15

Arun Ltd and Kumar Ltd operate in the same field, manufacturing newly born babies’ clothes.
Although Kumar Ltd also has interests in communication equipment, Arun ltd is planning to take
over Kumar Ltd and the Shareholders of Kumar Ltd do not regard it as a hostile bid.
The following information is available about the two Companies.
Arun Ltd Kumar Ltd
Current Earnings ₹ 6,50,00,000 ₹ 2,40,00,000
Number of Shares 50,00,000 15,00,000
Percentage of Retained Earnings 20% 80%
Return on Investment 15% 15%
Return required by Equity Shareholders 21% 24%
Dividends have just been paid and the Retained Earnings have already been re-invested in new
projects. Arun Ltd plans to adopt a policy of retaining 35% of Earnings after Takeover and expects
to achieve a 17% Return on New Investment.
Saving due to economies of scale are expected to be ₹ 85,00,000 p.a. Required Return to Equity
Shareholders will fall to 20% due to portfolio effects. Requirements-
a. Calculate the existing Share Prices of Arun Ltd and Kumar Ltd.

151
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

b. Find the Value of Arun Ltd after the takeover.

c. Advise Arun Ltd on the maximum amount it should pay for Kumar Ltd.
Solution:
a) Existing Share Price:
Arun Ltd. Kumar Ltd.
Current Earning 6,50,00,000 2,40,00,000
÷ No. of shares 50,00,000 15,00,000
EPS 13 16
 Dividend Payout Ratio 1 – 0.2 = 0.8 1 – 0.8 = 0.2
D0 10.4 3.2
Growth = ₹ ROE 0.20  0.15 = 3% 0.80  0.15 = 12%
D1 10.4  1.03 3.2  1.12
P0 = = 59.51 = 29.87
Ke − g 0.21 − 0.03 0.24 − 0.12

b) Post-merger MV of Arun Ltd.:

E1 of Arun Ltd. [6,50,00,000  1.03] 6,69,50,000
E1 of Kumar Ltd. [2,40,00,000  1.12] 2,68,80,000
Synergy in Earnings 85,00,000
Post-merger earning after 1 year 10,23,30,000
 Payout ratio 65%
D1 6,65,14,500
Growth = 0.17  0.35 5.95%
6,65,14,500
Post-merger Value = = 47,34,12,811
0.20 – 0.0595
(c) Maximum amount Arun Ltd. should pay for Kumar Ltd
MVARUN + MVKUMAR + SV - Cash Paid
= Pre-merger MPS
nA
47,34,12,811 - Cash Paid
= 59.51
50,00,000
Cash Paid = 17,58,62,811
17,58,62,811
Cash per share = = ₹ 117.24
15,00,000

152
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

QUESTION 37:
RTP N 17

Teer Ltd. is considering acquisition of Nishana Ltd. CFO of Teer Ltd. is of opinion that Nishana Ltd.
will be able to generate operating cash flows (after deducting necessary capital expenditure) of ₹
10 crore per annum for 5 years.
The following additional information was not considered in the above estimations.
a. Office premises of Nishana Ltd. can be disposed of and its staff can be relocated in Teer Ltd.’s
office not impacting the operating cash flows of either businesses. However, this action will
generate an immediate capital gain of ₹ 20 crore.
b. Synergy Gain of ₹ 2 crore per annum is expected to be accrued from the proposed acquisition.
c. Nishana Ltd. has outstanding Debentures having a market value of ₹ 15 crore. It has no other
debts.
d. It is also estimated that after 5 years if necessary, Nishana Ltd. can also be disposed of for an
amount equal to five times its operating annual cash flow.
e. Calculate the maximum price to be paid for Nishana Ltd. if cost of capital of Teer Ltd. is 20%.
Ignore any type of taxation.
Solution:
(in ₹ Crores)
Year 0 1 2 3 4 5
Operating CF’s 10 10 10 10 10
Capital Gain 20
Synergy Gain 2 2 2 2 2
Disposal 50
CFs 20 12 12 12 12 62
PVAF @ 20% 1 0.833 0.694 0.579 0.482 0.402
DCF 20 9.996 8.328 6.948 5.784 24.924
Total Present Value 75.980
Less: MV of Debentures (15)
Maximum Price 60.980
Thus, the maximum price to be paid for acquisition of Nishana Ltd. ₹ 60.98 Crore.

153
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

C. Important Miscellaneous on M&A

QUESTION 38:
M 11 | RTP N 10

Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies are
dependent on the fluctuating business conditions. The following information is given for the total
value (debt + equity) structure of each of the two companies.
Business Condition Probability Simple Ltd. ₹ lacs Dimple Ltd. ₹ Lacs
High Growth 0.20 820 1050
Medium Growth 0.60 550 825
Slow Growth 0.20 410 590
The current debt of Dimple Ltd. is ₹ 65 lacs and Simple Ltd. is ₹ 460 lacs.
Calculate the expected value of debt and equity separately for the merged entity.
Also explain the reasons for any difference that exists from the expected values of debt and equity,
if they do not change.
Solution:
Calculation of expected value of Debt & Equity of simple Ltd.
Expected Expected
Probability Total Debt Equity
Debt Equity
High Growth 0.2 820 460 92 360 72
Medium Growth 0.6 550 460 276 90 54
Slow Growth 0.2 410 410* 82 0* 0
450 126
Since the Company has limited liability the value of equity cannot be negative therefore the value
of equity under slow growth will be taken as zero because of insolvency risk and the value of debt
is taken at 410 lacs
Calculation of expected value of Debt & Equity of Dimple Ltd.
Expected Expected
Probability Total Debt Equity
Debt Equity
High Growth 0.2 1050 65 13 985 197
Medium Growth 0.6 825 65 39 760 456
Slow Growth 0.2 590 65 13 525 105
65 758

Simple Dimple Total

154
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Expected Debt 450 65 515

Expected Equity 126 758 884
* Self-note: When the total value of company is less than debt, the amount payable to debt is
limited to the total value and claim of equity becomes zero.

155
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

D. Demerger
QUESTION 39:
N 05 | RTP

The following information is relating to Fortune India Ltd. having two divisions, viz. Pharma
Division and Fast Moving Consumer Goods Division (FMCG Division). Paid up share capital of
Fortune India Ltd. is consisting of 3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd.
decided to de-merge Pharma Division as Fortune Pharma Ltd. w.e.f. 1.4.2009. Details of Fortune
India Ltd. as on 31.3.2009 and of Fortune Pharma Ltd. as on 1.4.2009 are given below:
Particulars Fortune Pharma Ltd. ₹ Fortune India Ltd. ₹
Outside Liabilities
Secured Loans 400 Lakhs 3,000 lakhs
Unsecured Loans 2,400 lakhs 800 Lakhs
Current Liabilities & Provisions 1,300 lakhs 21,200 lakhs
Assets
Fixed Assets 7,740 lakhs 20,400 lakhs
Investments 7,600 lakhs 12,300 lakhs
Current Assets 8,800 lakhs 30,200 lakhs
Loans & Advances 900 Lakhs 7,300 lakhs
Deferred tax/Misc. Expenses 60 Lakhs (200) Lakhs
Board of Directors of the Company have decided to issue necessary equity shares of Fortune
Pharma Ltd. of Re. 1 each, without any consideration to the shareholders of Fortune India Ltd.
For the purpose following points are to be considered:
1. Transfer of Liabilities & Assets at Book value.
2. Estimated Profit for the year 2009-10 is ₹ 11,400 Lakh for Fortune India Ltd. & ₹ 1,470 lakhs
for Fortune Pharma Ltd.
3. Estimated Market Price of Fortune Pharma Ltd. is ₹ 24.50 per share.
4. Average P/E Ratio of FMCG sector is 42 & Pharma sector is 25, which is to be expected for
both the companies.
Calculate:
1. The Ratio in which shares of Fortune Pharma are to be issued to the shareholders of Fortune
India Ltd.
2. Expected Market price of Fortune India (FMCG) Ltd.
3. Book Value per share of both the Companies immediately after Demerger.
Solution:
1. Ratio in which shares of Fortune Pharma are to be issued
MPS 24.5
156
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

÷ PE 25
EPS [A] 0.98
Profit [B] 1,470
No. of shares to be issued of Fortune Pharma [B ÷ A] 1500
÷ Existing shares of Fortune India 3000
Exchange Ratio 0.5:1
EAES
2. EPS =
n
11,400
= = 3.8
3,000
MPS = EPS  PE Ratio
= 3.8  42
= 159.6
3. BV per share immediately after demerger
(₹ Lakhs)
Particulars Fortune India Fortune Pharma Fortune India (FMCG)
Assets 70,000 25,100 44,900
Outside liabilities 25,000 4,100 20,900
Shareholder’s fund 45,000 21,000 24,000
÷ No. of shares 3000 1500 3000
BVPS 14 8

157
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

E. Management Buyout & Leveraged Buyout

QUESTION 40:
RTP

Personal Computer Division of Distress Ltd., a computer hardware manufacturing company has
started facing financial difficulties for the last 2 to 3 years. The management of the division headed
by Mr. Smith is interested in a buyout on 1 April 2013. However, to make this buy-out successful
there is an urgent need to attract substantial funds from venture capitalists.
VenCap, a European venture capitalist firm has shown its interest to finance the proposed buy-
out. Distress Ltd. is interested to sell the division for ₹ 180 crore and Mr. Smith is of opinion that
an additional amount of ₹ 85 crores shall be required to make this division viable. The expected
financing pattern shall be as follows:
Amount
Source Mode
(₹ Crore)
Management Equity Shares of ₹ 10 each 60.00
VenCap VC Equity Shares of ₹ 10 each 22.50
9% Debentures with attached warrant of ₹ 100 each 22.50
8% Loan 160.00
Total 265.00
The warrants can be exercised any time after 4 years from now for 10 equity shares @ ₹ 120 per
share.
The loan is repayable in one go at the end of 8th year. The debentures are repayable in equal
annual instalment consisting of both principal and interest amount over a period of 6 years.
Mr. Smith is of view that the proposed dividend shall not be kept more than 12.5% of distributable
profit for the first 4 years. The forecasted EBIT after the proposed buyout is as follows:
Year 2013-14 2014-15 2015-16 2016-17
EBIT (₹ Crore) 48 57 68 82
Applicable tax rate is 35% and it is expected that it shall remain unchanged at least for 5-6 years.
In order to attract VenCap, Mr. Smith stated that book value of equity shall increase by 20% during
above 4 years. Although, VenCap has shown their interest in investment but are doubtful about
the projections of growth in the value as per projections of Mr. Smith. Further Vencap also
demanded that warrants should be convertible in 18 shares instead of 10 as proposed by Mr.
Smith.
You are required to determine whether or not the book value of equity is expected to grow by
20% per year. Further if you have been appointed by Mr. Smith as advisor then whether you would
suggest to accept the demand of Vencap of 18 shares instead of 10 or not.
Solution:

158
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

Amount of Debentures
Amount of Equal Annual Instalment =
PVAF (9% & 6 years)
22.50
= = ₹ 5.016 crores
4.486
Calculation of Interest:
Year Opening Interest @ 9% Instalment Closing
1 22.5 2.025 5.016 19.509
2 19.509 1.7558 5.016 16.249
3 16.249 1.4624 5.016 12.695
4 12.695 1.1436 5.016 8.8216
Income Statement:
Year 1 2 3 4
EBIT 48 57 68 82
Less: Interest on Debenture 2.025 1.756 1.462 1.143
Less: Interest on loan 12.8 12.8 12.8 12.8
PBT 33.175 42.444 53.738 68.057
Less: Tax @ 35% 11.611 14.855 18.808 23.82
EAT 21.564 27.589 34.93 44.237
Less: Dividend @ 12.5% 2.696 3.449 4.366 5.53
Retained profits 18.868 24.14 30.564 38.707
Total Retained Earning 112.279
BV at year 0 = 60 + 22.5 = 82.500
Addition in 4 years + 112.279
BV at Year 4 = 194.779
Calculating growth rate in BV:
194.79 = 82.50  (1 + g)4
G = 23.96%
This growth rate is slightly higher than 20% as projected by Mr. Smith.
If the condition of VenCap for 18 shares is accepted the expected shareholding after 4 years shall
be as follows:
60 Cr.
No. of shares held by Management [ ] 6.00 crore
10
22.5 Cr.
No. of shares held by VenCap at the starting stage [ ] 2.25 crore
10

159
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

22.50
No. of shares held by VenCap after 4 years [  18] 4.05 crore
100
Total holding of VenCap 6.30 crore
Thus, it is likely that Mr. Smith may not accept this condition of VenCap as this may result in losing
their majority ownership and control to VenCap. Mr. Smith may accept their condition if
management has further opportunity to increase their ownership through other forms.

QUESTION 41:
RTP M 15

TMC is a venture capital financier. It received a proposal for financing requiring an investment of
₹45 crore which returns ₹600 crore after 6 years if succeeds. However, it may be possible that the
project may fail at any time during the six years. The following table provide the estimates of
probabilities of the failure of the projects.
Year 1 2 3 4 5 6
Probability of failure 0.28 0.25 0.22 0.18 0.18 0.10
In the above table the probability that the project fails in the second year is given that it has
survived throughout year 1. Similarly, for year 2 and so forth.
TMC is considering an equity investment in the project. The beta of this type of project is 7. The
market return and risk-free rate of return are 8% and 6% respectively. You are required to
compute the expected NPV of the venture capital project and advice the TMC.
Solution:
Probability of project success
= (1 – 0.28) × (1 – 0.25) × (1 – 0.22) × (1 – 0.18) × (1 – 0.18) × (1– 0.10)
= 0.255
Probability of project will fail = 1 – 0.255 = 0.745
Cost of equity using CAPM, Ke = Rf +β (Rm – Rf)
= 6% + 7 × (8% – 6%) = 20%
Net present value of the project:
Expected Cash Inflow: (600 Cr. × 0.255 + 0 × 0.745) 153 Cr.
× PVF (20%, 6 years) 0.335
PV of Expected Inflows 51.255 Cr.
Less: PV of Initial Outflow 45 Cr.
NPV 6.255 Cr.
Since expected NPV of the project is positive it should be accepted.

160
Adish Jain CA CFA
 Mergers, Acquisition & Corporate Restructuring

F. Financial Restructuring | Reconstruction

QUESTION 42:
SM | M 17 | N 11 | RTP

The following is the Balance-sheet of XYZ Company Ltd as on March 31st, 2013. (₹ Lakhs)
Liabilities Amount Assets Amount
6 lakh equity shares of ₹100/- each 600 Land & Building 200
2 lakh 14% Preference shares of ₹100/- 200 Plant & Machinery 300
13% Debentures 200 Furniture & Fixtures 50
Debenture Interest accrued and Payable 26 Inventory 150
Loan from Bank 74 Sundry debtors 70
Trade Creditors 300 Cash at Bank 130
Preliminary Expenses 10
Cost of Issue of debentures 5
Profit & Loss A/c 485
1400 1400
The XYZ Company did not perform well and has suffered sizable losses during the last few years.
However, it is now felt that the company can be nursed back to health by proper financial
restructuring and consequently the following scheme of reconstruction has been devised:
a. Equity shares are to be reduced to ₹ 25/- per share, fully paid up;
b. Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of
₹50 each, fully paid up.
c. Debenture holders have agreed to forego interest accrued to them. Beside this, they have
agreed to accept new debentures carrying a coupon rate of 9%.
d. Trade creditors have agreed to forgo 25% of their existing claim; for the balance sum they
have agreed to convert their claims into equity shares of ₹ 25/- each.
e. In order to make payment for bank loan and augment the working capital, the company issues
6 lakh equity shares at ₹ 25/- each; the entire sum is required to be paid on application. The
existing shareholders have agreed to subscribe to the new issue.
f. While Land and Building is to be revalued at ₹ 250 lakh, Plant & Machinery is to be written
down to ₹ 104 lakh. A provision amounting to ₹ 5 lakh is to be made for bad and doubtful
debts.
You are required to show the impact of financial restructuring/re-construction. Also, prepare the
new balance sheet assuming the scheme of re-construction is implemented in letter and spirit.
Solution:
Impact of Financial Reconstruction
i) Benefits to XYZ Ltd.
161
Adish Jain CA CFA
Mergers, Acquisition & Corporate Restructuring

In ₹ Lakhs
Equity shares claimed reduced [6 lakhs  (100 - 25)] 450
Pref shares claim reduced [2 lakhs  (100 – 50)] 100
Debentures holder agree to forego 26
Trade creditors (300  25%) 75
Land and Building (250 – 200) 50
701
ii) Utilization of benefits:
In ₹ Lakhs
Plant and machinery 196
Provision for Bad & Doubtful 5
Preliminary expenses 10
Cost of issue of Debentures 5
Writing off P/L Account 485
701
Balance sheet after reconstruction
Liabilities Amount Asset Amount
21,00,000 Equity Shares of ₹ 25 525 Land & Building 250
2 lakhs 10% Preference shares of ₹ 50/- 100 Plant & Mach 104
9% Debentures 200 Furniture & Fix 50
Inventory 150
Sundry debtors (70 – 5) 65
Cash at Bank (B/F) 206
825 825
Calculation of Equity Shares:
Existing equity shares 6,00,000
300 Lakhs × (1 – 0.25)
Issued to creditors [ ] 9,00,000
25
New equity shares 6,00,000
Total Equity Shares 21,00,000

162
Adish Jain CA CFA