Transcript

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 1: Exchange Ratio Saviruchi Ltd (has 200000 shares outstanding) wants to acquire Durgabhavan Ltd(has 100000 shares outstanding), by exchanging its 1.6 shares for every share of Durgabhavan Ltd. Calculate the post-merger number of shares Solution: New Shares to be issued to Target = Exchange Ratio X Existing No. of shares of Target New shares to be issued to Durgabhavan = 1.6 X 100000 = 160000 Existing Shares of Saviruchi = 200000 Post-Merger Number of Shares = 200000 + 160000 = 360000 Exercise 2: Exchange Ratio Kelloggs Ltd is taking over Corn Flakes Ltd. The shareholders of Corn Flakes Ltd would receive 0.8 share of Kelloggs Ltd for each share held by them. No. of shares of Kelloggs Ltd before Merger is 250000 and No. of shares of Corn Flakes Ltd pre-merger is 175000. Calculate the post-merger no. of shares Solution: New shares to be issued to Corn Flakes = 0.8 X 175000 = 140000 Existing Shares of Kelloggs = 250000 Post-Merger Number of Shares = 250000 + 140000 = 390000 Exercise 3: Exchange Ratio Mylari Company is acquiring Harihara Company. Mylari will pay 0.5 of its shares to the shareholders of Harihara for each share held by them. Existing no. of Shares of Mylari is 500 Million and that of Harihara Co. is 250 Million. Calculate the post-merger number of shares Solution: New shares to be issued to Harihara = 0.5 X 250 = 125 Mn Existing Shares of Mylari = 500 Mn Post-Merger Number of Shares = 500 + 125 = 625 Mn Exercise 4: Exchange Ratio Rice Ltd acquires Wheat Ltd by exchanging one share for every two shares of Wheat Ltd. Calculate the post-merger number of shares of Rice Ltd. Outstanding, if pre-merger number of shares were as below: Solution: New shares to be issued to Wheat = 0.5 X 400 = 200 Existing Shares of Rice = 1000 Post-Merger Number of Shares = 1000 + 200 = 1200
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Rice Ltd – 1000

Wheat Ltd – 400

1

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 5: Exchange Ratio Based on the information given below ascertain the exchange ratio based on Net Assets Value: Slice Ltd (Acquirer) Total Assets External Liabilities Solution: Net Assets = Total Assets – Liabilities Net Assets of Slice Ltd = 1000 – 400 = 600 Lacs Net Assets of Maaza Ltd = 500 – 200 = 300 Lacs Net Assets Ratio Exchange Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 300/600 = 0.5 = 0.5:1 i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd Exercise 6: Exchange Ratio Based on the information given below determine the exchange ratio based on Net Assets Value: Torino Ltd (Acquirer) Citra Ltd (Target) Fixed Assets Current Assets 13% Debentures Creditors Solution: Net Assets = Total Assets – Liabilities Net Assets of Torino Ltd = (150+100) – (100+100) = 50 Lacs Net Assets of Maaza Ltd = (100+50) – (40+10) = 100 Lacs Net Assets Ratio Exchange Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2 = 2:1 150 100 100 100 100 50 40 10 1000 Lacs 400 Lacs Maaza Ltd (Target) 500 Lacs 200 Lacs

i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd Exercise 7: Exchange Ratio Determine the exchange ratio in case of below Merger, based on EPS proportion: Fanta Ltd(Acquirer) EPS Solution Exchange Ratio based on EPS proportion Exchange Ratio based on EPS proportion = EPS of Target Co / EPS of Acquiring Co = 50 / 100 = 0.5 Rs. 100 Sprite Ltd(Target) Rs.50

Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

2

1250000 50000 KIRAN KUMAR.5 Shareholders of Idli will get 2. 83 Market Price of Pizza Hut Ltd (Target Co) – Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 8: Exchange Ratio Determine the exchange ratio in case of below Merger. of Shares Solution Market Price = P/E Ratio X EPS Market Price = P/E Ratio X (Profit after Tax/No. based on EPS proportion: Thumsup Ltd(Acquirer) PAT Solution EPS = Profit after Tax / No. VVCE. 109 Exchange Ratio based on EPS proportion = 109 / 67 = 1. 6700000 No. Asst. 20 Lacs 100000 Idli Ltd(Target) 10 Times Rs.63 Shareholders of Mountaindew will get 1. of shares 100000 Exercise 9: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Market Price of Dominos Ltd (Acquiring Co) – Rs. of Shares) Market Price of Dosa Ltd (Acquiring Co) – 5 X (2000000/100000) = 5 X 20 = 100 Market Price of Pizza Hut Ltd (Target Co) – 10 X (1250000/50000) = 10 X 25 = 250 Exchange Ratio based on Market Price = 250 / 100 = 2.Mergers. 67 EPS of Mountaindew Ltd = 5450000 / 50000 = Rs. 44 Solution Exchange Ratio based on Market Price = Market Price of Target / Market Price of Acquiring Exchange Ratio based on Market Price = 44 / 83 = 0.5 share of Dosa Ltd for every share held in Idli 5 Times Rs.53 share of Dominos Ltd for every share held in Pizza Hut Exercise 10: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Dosa Ltd(Acquirer) P/E Ratio Profit after Tax No. Mysore 3 .53 Shareholders of Pizza Hut will get 0. 5450000 50000 Rs. Professor. of Shares EPS of Thumsup Ltd = 6700000 / 100000 = Rs.63 share of Thumsup for every share held in Mountaindew Mountaindew Ltd(Target) Rs.

based on (i)Net Assets Value (ii)Earnings Per Share (iii) Which method would you prefer from Shanthisagar Ltd’s point of view? Solution i) Exchange Ratio based on Net Assets Value Shanthisagar Fixed Assets Net Current Assets Total Assets Less: 10% Debentures Less: Preference Shares Net Assets No.125 KIRAN KUMAR. Professor.Mergers. Asst.8 56000 5000 11. VVCE.2/13.2 Maheshprasad 35000 26000 61000 5000 Market Price? Exchange Ratio based on Net Assets = 11. June-2010. 10 Marks) Shanthisagar Ltd wishes to takeover Maheshprasad Ltd. Mysore 4 . 10 per share) 100000 50000 Share Premium Account 2000 Profit and Loss Account 38000 4000 Preference Shares 20000 10% Debentures 15000 5000 Total 173000 61000 Fixed Assets 122000 35000 Net Current Assets 51000 26000 Maintainable Annual Profit After Tax 24000 15000 For Equity Shareholders Market Price per Equity Share 24 27 Price Earnings Ratio 10 9 What offer do you think Shanthisagar Ltd could make to Maheshprasad Ltd in terms of exchange ratio.4 = 1.4 15000 5000 3 Exchange Ratio based on EPS = 3/2.81 ii) Exchange Ratio based on EPS Profit No.8 = 0. of Shares Net Assets per share 122000 51000 173000 15000 20000 138000 10000 13. of Shares Earnings per share 24000 10000 2. MBA. The financial details of the two companies are as under: Particulars Shanthisagar Maheshprasad Equity Shares (Rs.25 iii) Exchange Ratio based on Market Price per share Market Price 24 27 Exchange Ratio based on MPS = 27/24 = 1. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise – 11: Exchange Ratio (VTU.

2 12 Heritage Ltd Rs. 1000 800 Rs.5 shares of acquiring company – Iyangars Ltd to be given to shareholders of Target Company – SLV Ltd for every one share of SLV Ltd held by them Profit after Tax of Iyangars – Rs. 4500000 No. of shares (using EPS) Finding out Market Price through P/E ratio formula P/E Ratio = Market Price / EPS Solving for x.5 No. 10 Pre-Merger EPS of SLV Ltd 4500000/180000 = Rs.25 8 Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd. i) ii) Solution Nandini No. Asst.Mergers. of Shares = 250000 + (180000 X 0.5) = 250000 + 90000 = 340000 Post-Merger EPS = 7000000/340000 = Rs. 1.58 KIRAN KUMAR. of outstanding equity shares of SLV Ltd – 180000 Solution EPS = PAT / No.25 10 2000 12 = x/2 24 5 . Relevant financial information is as below: Particulars Present Earnings (in thousands) Common Shares (in thousands) Earnings Per Share Price/Earnings Ratio Nandini Ltd Rs. 3 Marks) Nandini Ltd is considering the acquisition of Heritage Ltd with stock.5 X 800 = 1200 Exercise 13: EPS Management Based on the below data. Of shares Pre-Merger EPS of Iyangars Ltd = 2500000 / 250000 = Rs. 25 Post-Merger PAT = (2500000+4500000) = 7000000 Post-Merger No. of outstanding equity shares of Iyangars Ltd – 250000 No. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 12: Exchange Ratio (VTU. VVCE. 20.2) / 24 = 12/24 = 1. 4000 2000 Rs. calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Exchange Ratio – 0. MBA. of new shares to be issued = 1. Professor. we get Market Price as Exchange Ratio = (10 X 1. 2500000 Profit after Tax of SLV Ltd – Rs. Mysore What is the ratio of exchange of stock? How many new shares will be issued? Heritage 800 8 = x/1. Jul-2009.

Of shares = PAT / (Share Capital/Par Value) Pre-Merger EPS of Kohinoor Ltd = 1000 / (500/10) = 1000/50 = Rs. VVCE. 1000 Lacs Rs. Jun-2010. 16 Post-Merger PAT = (1000+800) = 1800 Lacs Post-Merger No. 14 2:1 Rs. 1 Crore (Par Value Re. Asst. what would be the new earnings per share for Maggi Ltd? (assuming that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market prices) iii) What should be the exchange ratio.Mergers. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 14: EPS Management Based on the below data. The following information is available in respect of the companies: Particulars No. MBA. 2500000 Rs. 10 Each) Rs. 21 Knorr Ltd 300000 Rs. of Equity Shares Earnings after Tax Market Value per Share i) ii) Maggi Ltd 500000 Rs. 12 Exercise 15: EPS Management (VTU. if Knorr Ltd wants to ensure the same earnings to members as before the merger? Solution i) Pre-Merger EPS Maggi PAT No. Professor. 20 Pre-Merger EPS of IndiaGates Ltd = 800/ (100/2) = 800/50 = Rs. 900000 Rs. 10 Marks) Maggi Ltd is intending to acquire Knorr Ltd (by merger). calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Kohinoor Ltd(Acquirer) Exchange Ratio PAT Share Capital each) Solution EPS = PAT / No. 5 Crores (Par Value Rs. 800 Lacs Rs.5 Crores Post-Merger EPS = 1800/150 = Rs. Mysore Knorr 900000 300000 3 2500000 500000 5 6 . of shares EPS KIRAN KUMAR. of Shares = 50 Lacs + (50 Lacs X 2) = 50 lacs + 100 Lacs = 150 Lacs or 1. 2 IndiaGates Ltd(Target) What is the present EPS of both companies? If the proposal merger takes place.

= Rs. of shares Therefore.00. 28/ 42 X 6.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price.000 Deepavali Ltd.00. of shares of Sankranthi = 10. Post-Merger No.000 + 18.00.00.000 = Rs.6 Exercise 16: EPS Management Sankranthi Ltd.00. of shares = 500000 + (300000 X .000 / 6.000 shares Post-Merger No.000) / 14. 18. Asst.6667 Post-Merger No. Number of equity shares Earnings after tax (Rs. by merger and the following information is available in respect of the companies: Sankranthi Ltd.Mergers. 50.00. 4.00. what would be the new earning per share for Sankranthi Ltd.) 42 KIRAN KUMAR.000 = Rs. 5 Deepavali Ltd.86 10. Mysore 7 .00.00.000 50. is intending to acquire Deepavali Ltd. 50.000 28 Market value per share (Rs.00.00.) Required: (i) What is the present EPS of both the companies? (ii) If the proposed merger takes place.00. = Rs. VVCE. based on market value per share = Rs.000 = 4.667) = 500000 + 200000 = 700000 Post-Merger EPS = 3400000 / 700000 = 4. 3 (ii) Number of Shares Deepavali limited’s shareholders will get in Sankranthi Ltd.00.000/10.000 + 4.000 = Rs. Professor.000 = 14. of shares = 680000 Shares offered to Knorr = 680000 – 500000 = 180000 Exchange Ratio = 180000 / 300000 = 0.000 18.00.00. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio ii) Post-Merger EPS Post-Merger PAT = 2500000 + 900000 = 3400000 Exchange Ratio = 14/21 = 0.00. 6.000 shares Post-Merger Earnings per share = (Rs.85 iii) Exchange Ratio to maintain Current EPS 5 = 3400000 / Post-Merger No. Solution (i) Pre-Merger EPS Sankranthi Ltd.

50 7. VVCE.75 Lacs Existing Shares of Dhara = 10 Lacs New shares to be issued to Kohinoor Shareholders = 13.50 Trupti Ltd 21 8. Solution Dhara Pre-Merger Market Value per share Pre-Merger Market Value per share Desired Exchange Ratio Post-Merger PAT = 56 + 21 = 77 Lacs Desired Post-Merger EPS = 5. of Shares Post-Merger No.6 Post-Merger No. Lacs No.50 = 18.40 Lacs = 0. Relevant financial data are as follows: Particulars PAT Rs. Mysore 8 .75 Lacs/8. of shares = ? EPS = PAT/No. Asst.40 2. MBA. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 17: EPS Management (VTU. Professor. of equity shares in lacs EPS Rs.6 = 13. on a share exchange basis.75 KIRAN KUMAR./share PER.45 12.Mergers.40 Lacs Maximum Exchange Ratio without diluting EPS and MV = 3. Jan-2010. no. of shares 5.60 = 70 Trupti 7. of times Dhara Ltd 56 10 5.60 12.6 = 77/No. of Shares = 77/5.75 Lacs Existing Shares of Kohinoor = 8.50 Determine premerger market value/share of each company and maximum exchange ratio Dhara Ltd can offer without dilution of its EPS and MV/share.50 X 5. 10 Marks) Trupti Ltd is being absorbed by Dhara Ltd.75 – 10 = 3.50 X 2.

10 Marks) Cadburys Ltd is considering acquisition of Bourneville Ltd. of equity shares MV/share Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 18: EPS Management (VTU. No.42 Pre-Merger EPS of Bourneville Shareholders = 60000/10000 = Rs.6 Post-Merger EPS = Post-Merger PAT / Post-Merger No.8 Post-Merger No. Mysore 9 . of shares 6 = 260000 / (40000 + shares issued to Bourneville shareholders) Shares issued to Bourneville Ltd = (260000/6) – 40000 = 3333 Exchange Ratio = 3333/10000 = 0.Mergers. of shares = 40000 + (0. Professor. Jan-2010. what will be the new EPS for Cadburys Ltd? Bourneville Ltd wants to make sure that earnings available to its shareholders will not be diluted due to merger. What should be the exchange ratio in this case? Solution Exchange Ratio = MV of Target Co/MV of Acquiring Co = 12/15 = 0.33 KIRAN KUMAR. Asst./share i) ii) Cadburys Ltd 200000 40000 15 5 Bourneville Ltd 60000 10000 12 If merger goes through by way of exchange of equity shares when exchange ratio is based on current market value of equity. MBA.8 X 10000) = 48000 Post-Merger Profits = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = 5. VVCE. EPS Rs. Following data are available for both: Particulars PAT Rs.

i) ii) iii) Solution Sunfeast Ltd Market Price Outstanding No of shares PAT Rs. Biskfarm has agreed to a plan where Sunfeast will offer current market value of Biskfarm’s shares.15 iii) Pre-Merger EPS of Sunfeast = Rs. Mysore 10 . VVCE.50 per share and PAT of Rs.32 * 100000)) = 500000/232000 = 2. i) Pre-Merger EPS Pre-Merger EPS Pre-Merger PER ii) PER = 8 times Current Market Price = PER X EPS = 8 X 1 = Rs. which would be Rs.5/1 = 12.2 =25/2 = 12. what is its current market price? What is the exchange ratio? What will be the post merger EPS of Sunfeast? What must be the exchange ratio for Sunfeast. 2 Post-Merger EPS = Post-Merger PAT / Post-Merger No. Asst.5 Biskfarm Ltd Rs.5 Rs.800000/Rs. so that its pre merger and post merger EPS will be the same? KIRAN KUMAR.12.5 What are the pre-merger EPS and PER of both companies? If Biskfarm’s PER is 8 times.8 X 100000 = 800000 No. Biskfarm has 1 lac shares outstanding. 1 lac. Professor. Jan-2010. 10 Marks) Sunfeast Ltd is considering a merger with Biskfarm Ltd. 12. 25 each. its current market value is Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 19: EPS Management (VTU.32 Post-Merger EPS = (400000+100000)/(200000 X (0. of shares to be issued = Rs. of shares 2 = (400000+100000)/post-merger no of share Post-merger no of shares = 500000/2 = 250000 New shares to be issued to Biskfarm = 250000 – existing shares of Sunfeast = 250000 – 200000 = 50000 Desired Exchange Ratio = 50000/100000 = 0. 25 200000 400000 =400000/200000 =Rs.1 =12. Shares of Sunfeast are currently traded at Rs. Merger will be effected through a stock swap.Mergers.50 100000 100000 =100000/100000 =Re. has 2 lacs shares outstanding and a PAT of Rs. 4 lacs.8 Sunfeast will pay Biskfarm its current market value of shares. MBA. 25 = 32000 Exchange Ratio = 32000/100000 = 0.

30 per share whereas Pepsi Ltd has 2 lacs shares outstanding each selling at Rs.5 = 4. post-merger. 1200000 = 200000 X Rs. Mysore 11 . Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 20: EPS Management (VTU.4 KIRAN KUMAR.5625 = No. EPS are Rs. Asst.25 = Rs. of Shares Post-Merger EPS (Alt 2) Impact on EPS: Coke Ltd EPS before Merger EPS after Merger Impact (Alt 2) 4 4.5:1 Exchange Ratio Post-Merger Profit Post-Merger No. of Shares Post-Merger EPS (Alt 1) Impact on EPS: Coke Ltd EPS before Merger EPS after Merger Impact (Alt 1) Alternative 2: ER at 0. Jan-2010.5 Coke Ltd : 1 Pepsi Ltd (0. 4 = Rs.5 = Rs. MBA. 2.125 .25/. Coke Ltd has 3 lac shares outstanding with a market price of Rs. VVCE.125 + 0.375 Decrease in EPS = 0.Mergers. 2.5 4. 15 Marks) Coke Ltd is considering purchase of Pepsi Ltd. Managements of both companies are discussing two proposals for exchanging shares as (i) in proportion to relative EPS for these companies (ii) 0.5625) = 300000 + 112500 = 412500 = Rs.125 Increase in EPS Pepsi Ltd 2.5625 = 4 = EPS of Target Company / EPS of Acquiring Company = 2.5) = 300000 + 100000 = 400000 = Rs. You are required to compute: (a) EPS. 1650000 = 300000 + (200000 X 0.25/. both alternative (b) Share impact on EPS for shareholders of two companies under both alternatives Solution Alternative 1: ER in EPS proportion Exchange Ratio Pre-Merger Profit of Coke Ltd Pre-Merger Profit of Pepsi Ltd Post-Merger Profit Post-Merger No.25/4 = 0. of Shares X EPS = 300000 X Rs. 450000 = 1200000 + 450000 = Rs. Professor.1650000/412500 = Rs. 4125 4 4 0 4 0 Pepsi Ltd 2.1650000/400000 = Rs. 1650000 = 300000 + (200000 X 0. 4 and Rs.5:1). 20 per share.0.25 per share (Coke Ltd and Pepsi Ltd respectively).

08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1. 3. Also compute the EPS after merger on the assumption that the anticipated growth rate in earnings is 8% for Britannia and 14% for Parle.8 Post-Merger No of shares = 200000 + (100000 X 0. The EPS are Rs. 18.43 Alternative 2 : Exchange Ratio 0. Find out the impact of merger on the EPS of merged firm.125 – 3. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 21: EPS Management Britannia Ltd is contemplating the purchase of Parle. 2. VVCE. Assuming that the two managements have agreed that the shareholders of Parle will receive Britannia’s shares in exchange for their shares: (i) (ii) In proportion to the relative earnings per share of the two firms or 0.9 KIRAN KUMAR.5 for Parle. Asst.125 Pre-Merger EPS of Britannia = 3.125 X 200000 = 625000 Alternative 1 : Exchange Ratio based on EPS Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 2.9 share of Britannia for one share of Parle.125 3. Britannia has 200000 shares outstanding with Rs.75.5 2.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 280000 (as calculated above) Post-Merger EPS (Alt 1) = 960000/280000 = 3. Mysore Parle 100000 18.Mergers.125 for Britannia and Rs.125 Impact of Merger on EPS (Alt 1)= 3.125 = 0.125 = 0 [No impact on EPS] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1. 25 market value per share while Parle has 100000 shares selling at Rs.8) = 200000 + 80000 = 280000 Post-Merger EPS = 875000/280000 = 3.75 2.5/3.5 X 100000 = 250000 12 . Professor. Solution Britannia Outstanding Shares Market Value per share EPS Profit 200000 25 3.

31 KIRAN KUMAR. Mysore 13 .017 Pre-Merger EPS of Britannia = 3. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 0. 0.9 Post-Merger No of shares = 200000 + (100000 X 0.125 Impact of Merger on EPS (Alt 2) = 3. Asst.Mergers.08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1.11] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 290000 (as calculated above) Post-Merger EPS (Alt 2) = 960000/290000 = 3.125 = -0. Professor.9) = 200000 + 90000 = 290000 Post-Merger EPS = 875000/290000 = 3. VVCE.11 [EPS diluted by Re.017 – 3.

90 90 45 2 60 60/2 = 30 Top Ramen 18 18 1 37 37/1 = 37 Foodles 18 9 2 46 46/2 = 23 Neither of the Takeovers is recommended to Curry.58 = 1. as the post-merger EPS of either 1.30 90+18 = 108 45 + (1. Lacs) Market Price of each share (Rs. which is 2 KIRAN KUMAR.7 108/56.9 is lower than Pre-Merger EPS of Curry.58 108/59.81 90+18 = 108 45 + (0. Mysore 14 . Si considering takeover of Top Ramen Ltd and Foodles Ltd.81 Takeover of Foodles 30/23 = 1.3 X 9) = 56. Will you recommend the Merger of either/both of the companies? Justify your answer. Professor.Mergers. of shares EPS Market Price P/E Ratio (ii) Calculation of Post-Merger EPS Takeover of Top Ramen Exchange Ratio Post-Merger Earnings Post-Merger Number of Shares Post-Merger EPS 30/37 = 0. The exchange ratio would be based on the P/E Ratio.7 = 1. Asst. Final. after the acquisition of Top Ramen and Foodles separately.) 450 90 60 Top Ramen 180 18 37 Foodles 90 18 46 Calculate (i) P/E Ratio (ii) EPS of Curry Ltd. Solution (i) Calculation of PER Curry Earnings No. Dec-1995) Curry Ltd. The financial data for the three companies are as follows: Curry Equity Share Capital of Rs. 10 each (Rs. Lacs) Earnings (Rs. VVCE.81 or 1.81 X 18) = 59. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 22: EPS Management (CS.

Mysore 15 . Professor. No. Asst. of shares = 40000 + (0.8:1 Post-Merger No. Earnings after Tax Rs. No. Final. of shares. VVCE. Bread Co. is studying the possible acquisition of Bun Co. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. of Shares of Post-Merger Company = 43333 Existing shares of Bread Ltd = 40000 Additional Shares to be issued = 3333 Existing Shares of Bun Ltd = 10000 Shares to be offered at the ratio 3333/10000 = 0. of shares 6 = 260000 / No. Dec-2000) Bread Co. 5. What should be the exchange ratio in that case? Solution Exchange Ratio = 12/15 = 0. what is new EPS for Bread Co? Bun Co. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 23: EPS Management (CS. of Equity shares (i) (ii) 200000 40000 Bun Co. by way of a merger.Mergers. 15 If the merger goes through exchange of equity shares and exchange ratio is based on the current market price.8 X 10000) = 40000 + 8000 = 48000 Post-Merger PAT = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = Rs. of shares Solving for No.33 KIRAN KUMAR. 60000 10000 12 Market Value per Share Rs. The following data are available in respect of the companies.42 EPS = Profit after Tax / No.

000 Post-Merger EPS = Rs.000 shares × (Rs.80.000/20. Ltd.20. 2) = 3.000 × Rs. VVCE.00.000 = 19.000 Post-Merger EPS = Rs.000 Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to shareholders of 'N' Co.00.04. of Shares = 16.80.00. = Rs. = 4. 5 Total earnings in M Co. 6 Exchange ratio = 6/5 = 1.000 = Rs. by way of merger.20. KIRAN KUMAR.6/Rs. available to new shareholders of N Co.? (ii) Easyday Ltd.Mergers. 1.) 200 (i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price. The following data are available in respect of the companies: Particulars Earnings after tax (Rs.00.00.000 shares Post-Merger No of shares = 16.80.00. Professor.000 × 1. 5 = Rs.80.1.000 = Rs.000 4.80.00.000 160 Market value per share (Rs. What should be the exchange ratio in that case? Solution (i) Calculation of new EPS of More Ltd.80.000 = Rs.000 + 3.24.00.000 Easyday Ltd. Ltd.00.000 + 4.000/19.00.000 = 20.20 = 4.00. 80.04.04. is studying the possible acquisition of Easyday.. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 24: EPS Management More Ltd.000 = Rs. of shares to be issued to Easyday = 4. No.00.00.000 16. 24.42 (ii) Desired Exchange Ratio Current EPS: More Ltd.00.000 Post-Merger Profits = 80. Ltd. 5.000 = 1.00. Mysore 16 . Ltd.20. Asst. of equity shares More Ltd. 24.000 Post-Merger No.000/16. of new shares to be issued to Easyday = 4..20.00. wants to be sure that the earnings available to its shareholders will not be diminished by the merger.00. = Rs.000/4.20 No.) No.1.00.000 + 24. what is the new earning per share for More Ltd. 5 Easyday Ltd.

5. is considering merger with Complan Ltd. Mysore 17 .000. 1.50 KIRAN KUMAR.50. what is its current market price? What is the exchange (ii) Current Market Price of Complan Ltd.50..25.000 shares outstanding.000 = 62.12. 1.25. The merger will be effected by means of a stock swap (exchange).000 / 2 = 3.25. has agreed to a plan under which Horlicks Ltd.25.500 – 2.40 Exchange ratio = Rs.000 1 10 10 ii) If Complan Ltd.Mergers. Particulars Earnings after taxes Number of shares outstanding Pre-Merger EPS Market Price per share P/E Ratio (times) Horlicks Ltd.2.4 = Rs..’s post-merger EPS be? iii) What should be the exchange ratio. Horlicks Ltd.000/Rs.’s shares: i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies? ratio? What will Horlicks Ltd.00.00.000 + (Rs.1.2. 5. 20.90.25.000 2 20 10 Complan Ltd.000/3.000 2.000 = 0.25.500 Number of shares required to be issued = 3.000.4.’s P/E ratio is 6. if Horlicks Ltd.500/1.1. its current market price is Rs. the exchange ratio is = 62. 5.16 (iii) Desired exchange ratio Total number of shares in post-merged company = Post -merger earnings / Pre -merger EPS of XYZ Ltd = Rs. if P/E ratio is 6.000 = 2.6. VVCE.50.. Professor. has 1. 6.. 1 × 6.25.20/6. Complan Ltd.25.00.125)] = Rs.6. and Complan Ltd. Asst.500 Therefore.4 = Rs. 10 and its EAT are Rs.000 shares outstanding and its earnings after taxes (EAT) amount to Rs.25.’s shares are currently traded at Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 25: EPS Management Horlicks Ltd.000)/[Rs.50.40 = 3.12. Complan Ltd.000 1. will offer the current market value of Complan Ltd.’s pre-merger and post-merger EPS are to be the same? Solution (i) Pre-merger EPS and P/E ratios of Horlicks Ltd.000 + Rs.125 Post merger EPS = (Rs. It has 2.

000 30.000 1 5 SIL 1 5 5 10. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 26: EPS Management Gemini Industries Ltd.00.000 (2 X 1000000) + (1 X 1000000) =30.20. Mysore RIL Rs.00.00.50.10. (SIL).4 10.000 10.000/12.000 =1000000 X 5 = 50.00.000 x 24) = 3. of equity shares o/s Post-Merger EPS PER Post-Merger Market Value Gains From Merger: Rs.00.000 2 10 SIL Rs.000 (1:4) or 0.00. the management of RIL estimates that the earnings will increase by 20%.00.Mergers.00.50. 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? (iii) Due to synergic effects. Asst.25 X 1000000)) = 12.00.00. The particulars of two companies are given below: Particulars Earnings After Tax (EAT) Equity shares O/s Earnings per share (EPS) PE Ratio (Times) Required: (i) What is the market value of each Company before merger? (ii) 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. VVCE.00.50. What is the new post-merger EPS and Price per share? Will the shareholders be better off or worse off than before the merger? Solution (i) Market value of Companies before Merger RIL EPS P/E Ratio Market Price Per Share Equity Shares Pre-Merger Market Value 2 10 20 10.00. (GIL) is considering a takeover of Sunrich Industries Ltd. Professor.000 10.25 (10.00. If there are no synergic effects.000 Post-Merger Market Price per share 10 x 2.000 + (0.000 (ii) Post Merger Effects on RIL Post merger earnings Exchange Ratio No.00.000 3.00.000 =1000000 X 20 = 2.00 (12.00.000 = 2.4 = 24 18 . Post-Merger Market Value of the Firm Less: Pre-Merger Market Value KIRAN KUMAR.

000 x 24 2.Mergers.88 PE Ratio = 10 Post-Merger Market Price Per Share = Rs.00.2.50. 2.00.00.00.00. -60.50. of equity shares outstanding: 12.000 -2.000 50.00.000 No. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio RIL 2.000 SIL 50.28. Mysore 19 .00.50.36.000 x 20% = Rs.2. the shareholders of both the companies (RIL + SIL) are better off than before KIRAN KUMAR.000 = Rs.000 50.000 Apportionment of Gains between the Shareholders: Thus.30.000 x 24 Less:Pre-Merger Market Value Gains from Merger: (iii) Post-Merger Earnings: Increase in Earnings by 20% New Earnings: Rs.00.000 Post-Merger EPS: Rs.00.000 Total gains from Merger Particulars Post Merger Market Value: 10.000 10.88 x 10 = Rs.00.00.50. Shareholders will be better-off than before the merger situation. 36. Professor.000 RIL Rs. Asst.00. VVCE.000/12.00.00. 2.000 40.00.40.80 So.000 SIL Rs.00.

10 Marks)(Figures Changed) The following information is provided related to the acquiring Firm Regaalis Limited and the target Firm Metropole Limited: Regaalis Limited Earnings after tax (Rs. 4 Rs. 20/Rs. 100 Metropole Ltd. MBA. 100 Lakhs X Rs. 100 = 0.2. of shares to be issued = Rs. Rs.20 crores Metropole Ltd. 10 Rs. 10. EPS Market Price Rs.82 crores KIRAN KUMAR.000 Lakhs/ 200 lakhs = Rs.02 crores Less: Pre-merger market value Regaalis Ltd.2 = Rs. 2. (v) Calculate gain/loss for shareholders of the two independent companies after acquisition. 20 = 20 crores Rs. 21. 100 = 200 crores Metropole Ltd. Solution Regaalis Ltd.000 lakhs + Rs.91 X 10 = Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 27: Market Value of Merged Firm (VTU. assuming P/E ratio of Regaalis Limited remains unchanged? (iv) Determine the market value of the merged firm.20 crores 200. 100 lakh X 0.02 crores Appropriation of gains from the merger among shareholders: Regaalis Ltd. 20.00 crores 18. 109. 4 X 5 = Rs. 10 X 10 = Rs. 20 2. Asst.) Number of shares outstanding P/E ratio (times) Required: (i) What is the Swap Ratio based on current market prices? (ii) What is the EPS of Regaalis Limited after acquisition? (iii) What is the expected market price per share of Regaalis Limited after acquisition. Professor. 220 crores Gain from merger Rs.10 market price X 220 lakhs shares = 240.000 lakhs 200 lakhs 10 Metropole Limited 400 lakhs 100 lakhs 5 (i) The Swap ratio based on current market price = Rs.Mergers.2 No.91 (iii) Expected market price after merger assuming P / E 10 times = Rs. 109. VVCE. 400 lakhs / 100 lakhs = Rs. 20 lakhs.02 crores (v) Gain from the merger Post merger market value of the merged firm Rs. 200 Lakhs X Rs.82 crores 20. Mysore 20 . 10.10 (iv) Market value of merged firm = Rs. 240. 400 lakhs)/(200 lakhs + 20 lakhs) = Rs. Jul-2011. (ii) EPS after merger = (Rs.00 crores 1. Post merger value Less: Pre-merger market value Gain to Shareholders 218.

It anticipates to maintain the existing P/E Ratio subsequent to the merger also.) Number of equity shares outstanding Market Price per Share (Rs. 10 Marks) Pillsbury Ltd wants to acquire Ashirvad Ltd.64 = 32. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 28: Market Value of Merged Firm (VTU. Asst.6 X 35) / 6 = 9.6 shares for every share of Ashirvad Ltd. Professor.4 ii) Pre-Merger EPS and P/E Ratio Pillsbury Ltd Pre-Merger EPS P/E Ratio iii) Implied P/E Ratio 1500000/300000 = 5 35/5 = 7 = (1. MBA. by exchanging its 1. Jul-2011. VVCE.67 = Market price of shares offered/Current EPS KIRAN KUMAR.33 iv) EPS of Pillsbury after acquisition Number of shares after merger = 300000 + (75000 X 1. The relevant financial data are furnished below: Particulars Earnings After Tax (Rs.) i) ii) iii) iv) v) Pillsbury Ltd 1500000 300000 35 Ashirvad Ltd 450000 75000 40 What is the exchange ratio based on market price? What is pre-merger EPS and P/E ratio for each company? What is the P/E ratio used in acquiring Ashirvad Ltd? What will be EPS of Pillsbury Ltd after the acquisition? What is the expected market price per share of the merged company? Solution i) Exchange Ratio based on MP =(1.Mergers.6 X 35)/40 = 1.6) = 420000 Total Profit of Merged Company = 1500000 + 450000 = 1950000 EPS post-merger = 1950000 / 420000 = 4.64 v) Post-Merger Market Price = P/E ratio X EPS = 7 X 4. Mysore 21 .48 Ashirvad Ltd 450000/75000 = 6 40/6 = 6.

In Crores) No. Mysore 22 .4 Crores X Rs.8 / 4 = 6 iii) Post-Merger Market Value per Share P = 6 X 4. In crores) Profit after Tax (Rs. MBA.8 * 3) = 12 + 2.6 Crores KIRAN KUMAR.4 Crore v) Post-Merger Total Market Capitalization TMC = Rs. 4. 4.8 * 3) = 12 + 2.86 ii) Post-Merger or Implied P/E Ratio Post-Merger EPS = 70 / 14.4 = 14.4 = Rs.Mergers. The shareholders of Saffola Ltd would receive 0. 70 Crores Post-Merger No. of shares (Crore) EPS (Rs. of shares = 12 + (0. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 29: Market Value of Merged Firm (VTU. The relevant data for two companies are as below: Sunpure Ltd Net Sales (Rs. Jul-2009. 7 Marks) Sunpure Ltd is taking over Saffola Ltd. Asst. 14.83 30 6. of shares = 12 + (0. 24 = Rs.8 of Sunpure Ltd for each share held by them.4 = Rs.86 Implied P/E Ratio = 30 X 0. VVCE.) Price Earnings Ratio 335 58 12 4.86 = Rs.4 = 14. 345.21 Saffola Ltd 118 12 3 4 20 5 For the combined company (after merger) you are required to calculate (i) EPS (ii) P/E Ratio (iii) market value per share (iv) number of shares (v) Total Market Capitalization Solution i) Post-Merger EPS Post-Merger Profit = 58 + 12 = Rs.4 Crore Post-Merger EPS = 70 / 14. Professor.) Market Value per Share (Rs. 24 iv) Post-Merger number of shares Post-Merger No.

In lacs) No. Asst. 180 Lacs Post-Merger No.) Market Price per Share (Rs.3. if P/E falls to 12 after Merger.92 Lacs Pre-Merger Value 25 X Rs.5 X 8) = 25 + 4 = 29 Lacs Post-Merger EPS = 180 / 29 = Rs. Mysore 23 . of shares = 25 + (0.92 Lacs Therefore. 10 Marks) MTR Company is acquiring Ruchi Company.48 = 1862 Lacs 4 X 74. The data for two companies are as below: Particulars Profit after Tax (Rs. Jul-2009. MBA. 74. Post-Merger market price of MTR shares = 12 X 6. Ruchi Ltd’s shareholders receive a premium of Rs.5 of its shares to the shareholders of Ruchi for each share held by them.48 = 297. 78 = 1950 Lacs 8 X 33.48 Gain Apportionment among shareholders Post-Merger Value MTR Ltd Ruchi Ltd 25 X 74.Mergers. If the P/E ratio falls to 12 after the merger. of shares (in lacs) EPS (Rs.49 per share of Ruchi Ltd they held before merger) If P/E falls to 12 after Merger. 6.) P/E Ratio MTR 150 25 6 78 13 Ruchi 30 8 3. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 30: Market Value of Merged Firm (VTU. Professor.75 = 270 Lacs Difference Minus 88 Lacs 27. VVCE.75 9 Calculate the earnings per share of the surviving firm after merger.21 = Rs.75 33. Merger is not beneficial to MTR Ltd. 27.21 If P/E Ratio falls to 12 after Merger. KIRAN KUMAR. what is the premium received by the shareholders of Ruchi (using the surviving firm’s new price)? Is the merger beneficial for MTR shareholders? Solution Post-Merger EPS of MTR Post-Merger Profit = 150 + 30 = Rs.92 lacs (Or Rs. MTR will pay 0. as the gain to shareholders is negative 88 Lacs.

Professor. Asst. Required: i) ii) Calculate pre-merger market value per share for both the companies Calculate post-merger EPS.5 = 12.83 = 46.24 Post-Merger Market Price = 2. Market Capitalization (Rs.66 Post-Merger P/E = 46.5 Lacs Post-Merger EPS = 28 / 12. DPS Rs.83 500 8 500/8 = Rs. VVCE.5 Maharaja 60 3 60/3 = Rs. market value per share and price earnings ratio if shareholders of Maharaja Ltd are offered a share of Rs. 60 for Rs. Jan-2010.Mergers. In lakhs) Number of shares EPS Rs. MP. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 31: Market Value of Merged Firm (VTU. 40 in a share exchange for merger Solution i) Pre-Merger Market Price Everest Market Capitalization Number of Shares Market Price Exchange Ratio = 3:2 Post-Merger Profit = 25 +3 = 28 Lacs Post-Merger Number of shares = 8 + (3 X 1.5 = Rs.24 = 20. 20 25 400 800000 3 2 500 Maharaja Ltd 3 60 300000 1 1 60 ii) Calculation of Post-Merger EPS.24 X 20.66/2. 62. 12 Marks) Everest Ltd and Maharaja Ltd provide the following financial data: Everest Ltd EAT (Rs. Mysore 24 . Lakh) Everest Ltd planned to acquire Maharaja Ltd.5) = 8 + 4. 2. P/E KIRAN KUMAR. In lakhs) Net Sales (Rs. MBA.

Dec-2011. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 32: Market Value of Merged Firm (VTU.5 Post-Merger No.5 Post-Merger Market Price per Share 7.5 X 5000) = 16000 + 2500 = 18500 Post-Merger EPS 200000/18500 = 10. shareholders of Pigeon Ltd (Target Co) are worse off from this Merger. 10 Marks) The following data concerns Prestige Ltd and Pigeon Ltd: Prestige Ltd Pigeon Ltd Earnings after taxes Rs.075 -202687 Less:Pre-Merger Market Value 1200000 250000 Gains from Merger: 97200 . VVCE.81 = 81. 160000 Rs.075 1297200 -2500 x 81. Solution Prestige Pigeon Pre-Merger EPS 160000/16000 = 10 40000/5000 = 8 Pre-Merger PER 75/10 = 7. the shareholders of Prestige Ltd (Acquiring Co) are better off by this Merger. of Shares 16000 + (0.81 Post-Merger P/E Ratio 7. Mysore 25 .5 X 10.Mergers. 75 Rs. Show extent of gain accruing to the shareholders of two companies as a result of merger. Apportion the gain among shareholders and comment.25 Pre-Merger Market Value of Firm 75 X 16000 = 1200000 50 X 5000 = 250000 Post-Merger EAT 160000+40000 = 200000 Exchange Ratio 1/2 = 0. Asst. KIRAN KUMAR. 50 Prestige Ltd acquires Pigeon Ltd by exchanging one share for every two shares of Pigeon Ltd. as they are losing Rs. 97200 from this Merger.47313 Thus.075) = 1499887 Gains From Merger: Post-Merger Market Value of the Firm 1499887 Less: Pre-Merger Market Value Prestige 1200000 Pigeon 250000 1450000 Total gains from Merger 49887 Apportionment of Gains between the Shareholders: Particulars Prestige Pigeon Post Merger Market Value: 16000 x 81. Assume that Prestige Ltd expects to have same earnings and P/E ratios after the merger as before (no synergy).075 Total Value (18500 x 81. as they gain Rs. 40000 Equity shares outstanding 16000 5000 Market Price per share Rs. MBA. Whereas.5 50/8 = 6. Professor. 47313 from their market value because of this Merger.

60.90.60.000)/6. for acquisition of Apple Ltd. (iv) What is the expected market price per share of Mango Ltd.13 x .5 EPS Rs.000 x 31.31.1.80.80. of Shares = (6.30 Total value = (6.5) = Rs.57 (iv) New Market Price of Mango Ltd. 10 times Expected EPS after merger Rs.000 Expected Market Price Rs.21.18. After acquisition: Total Earnings = (18.3.3 10 times Rs. Profit after tax Equity shares outstanding (Nos.00. wants to acquire Apple Ltd. and has offered a swap ratio of 1:2 (0.97.000 No. after the acquisition? (iii) Determine the equivalent earnings per share of Apple Ltd. Rs.30) = Rs.30 (v) Market Value of merged firm: Total number of Shares 6.13 x 10) = Rs.5 shares for every one share of Apple Ltd. assuming its PE multiple remains unchanged? (v) Determine the market value of the merged firm. (ii) EPS of Mango Ltd.3.00.14 Apple Ltd.90. new Shares = 1.: No.00.2 7 times KIRAN KUMAR.000 Rs.000) = Rs.000 1.000+3.000 + 90.5 = 90.60.000) = 6.000 Rs.31.90.15.13 Post-Merger Market Price = (3.13 (iii) Equivalent EPS of Apple Ltd.00.) EPS PE Ratio Market price per share Required: (i) The number of equity shares to be issued by Mango Ltd.3. Professor. Solution (i) The number of shares to be issued by Mango Ltd.000 x .30 Rs. Following information is provided: Mango Ltd.5 So. Mysore 26 .3.: The Exchange ratio is 0.000) = Rs.2. of new Shares for every one share 0. after the acquisition.60.000 Rs. (ii) What is the EPS of Mango Ltd.).90.Mergers.000 Post-Merger EPS = (21. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 33: Market Value of Merged Firm Mango Ltd.000 shares. (P/E Remaining unchanged): Present P/E Ratio of Mango Ltd. VVCE. Asst.000 6.13 Equivalent EPS = (3.