Академический Документы
Профессиональный Документы
Культура Документы
VALUATION IN M&A
Some Words
Book Value Replacement Value
Amount at which an asset is shown in Cost of acquiring a new asset of
the B/S equal utility
Market Value Salvage Value
Price at which an asset can be sold in Scrap value of an asset which is fully
the market depreciated
Intrinsic Value Value of Goodwill
Present Value of Incremental future Present Value of Supernormal Profits
cash inflows due to the asset the firm will earn due to the asset
Liquidation Value Fair Value
Price at which the asset can be sold if Average of Book Value, Intrinsic Value
company liquidates and Market Value
Valuation Approaches
Valuation Approaches Net Book Value Approach
D1
P
r-g
D1 = Dividend Expected in the next year
r = Rate of Return on Equity
g = Growth Rate of Share Price
Valuation Approaches Comparable Company Analysis
Market Cap
Company (Rs. Crs) P/E Ratio EV/EBITDA
TCS 253633 21.66 16.02
Lets Exercise
Valuing Operating Synergy
Forms of Operating Synergy
Higher cash flows from existing
savings
Cost savings and Economies of scale
Higher expected growth rate
Market power
Longer growth period
Competitive advantages
Lower cost of capital
Debt Capacity
Valuing Operating Synergy
Payment by Cash
All the shareholders of Target Company are
paid cash to sell the ownership
Advantageous as EPS dilution will be lesser
Methods of Financing Mergers
Exchange of Shares
Allthe shareholders of Target Company
are given shares of Acquiring Company
Rational EXCHANGE RATIO is the key
Exchange ratio?
Pillsbury Ltd wants to acquire Ashirvad
Ltd, by exchanging its 1.6 shares for every
share of Ashirvad Ltd.
Pillsbury Ltd Ashirvad Ltd
No. of shares 200000 100000
New Shares 0 160000
Post-Merger 200000 + 160000 0
Exchange ratio?
Sunpure Ltd is taking over Saffola Ltd. The
shareholders of Saffola Ltd would receive 0.8 share
of Sunpure Ltd for each share held by them
Sunpure Ltd Saffola Ltd
Post-Merger 390000 0
Exchange ratio?
MTR Company is acquiring Ruchi Company. MTR
will pay 0.5 of its shares to the shareholders of
Ruchi for each share held by them.
MTR Company Ruchi Company
No. of shares 500 Million 250 Million
New Shares 0 125
Post-Merger 625 0
Exchange ratio?
Prestige Ltd acquires Pigeon Ltd by
exchanging one share for every two shares of
Pigeon Ltd. Prestige Ltd Pigeon Ltd
Post-Merger 1200 0
Determining Exchange Ratio
Net Assets Value Ratio
In proportion of EPS
In proportion of Market Price per Share
Determining Exchange Ratio Net Assets Value
Slice Ltd Maaza Ltd
Total Assets 1000 Lacs 500 Lacs
External Liabilities 400 Lacs 200 Lacs
Shareholders of Maaza will get 0.5 share of Slice Ltd for every share held in Maaza
Determining Exchange Ratio Net Assets Value
Torino Ltd Citra Ltd
Total Assets 250 Lacs 150
External Liabilities 200 Lacs 50
Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite
Determining Exchange Ratio EPS Proportion
Thumsup Ltd Mountaindew Ltd
EPS Rs. 67 Rs. 109
Shareholders of Pizza Hut will get 0.53 share of Dominos Ltd for
every share held in Pizza Hut
Determining Exchange Ratio Market Price Proportion
Dosa Ltd Idli Ltd
Market Price Rs. 100 Rs. 250
Market Price Ratio of Idli Ltd to Dosa Ltd - 250 / 100 = 2.5
Shareholders of Idli will get 2.5 share of Dosa Ltd for every
share held in Idli
EPS Management
Pre-Merger EPS
Post-Merger EPS
Calculate Pre-Merger EPS for both companies
Calculate Post-Merger EPS for acquiring company
EPS Dilution
EPS Addition
Maggi Ltd Knorr Ltd
No. of Equity Shares 500000 300000
Earnings after Tax 2500000 900000
Market Value Per Share Rs. 21 Rs. 14
P/E Ratio 13 9
Methods of Financing Mergers
Debt and Preference Share Financing
All the shareholders of Target Company are given
Fixed Interest Bearing Convertible Debentures
Fixed Dividend Bearing Convertible Preference Shares
Tender Offer
Target Shareholders are directly offered to sell their shares at a
premium
Mergers as a Capital Budgeting Decision
1. Project Free Cash Flows 3. Compare with Cost of Acquisition
After Tax Operating Profit Payment to Target Companys Shareholders
Less Additional Capital Investment Plus Payment towards other External Liabilities
Plus Estimated value of other obligations
Less Investment in Working Capital
Plus Liquidation Expenses
2. Discount at Cost of Capital Less Cash Realization
Revise What Weve Learnt