Mergerd snd Acquisitions

case study
ABC’s acquisitions of xyx
Submitted by
Kinay Dave
.No 36
 Valuation of companies and their swap ratio
Bidder target
ABC XYZ
ABC XYZ No. of shares (in crores) 7.45 7.1
EPS 74.23 11.27 Average weekly price 705 85
PE 9.50 7.54 Base case PAT (crores) 553 80
Price 705.00 85.00 PAT growth (without acquisitions) 15% 5%
Bought at PE 9.50 7.54
PAT growth (post acquisition expectations)
Price of Bidder 705 85 Price of Target
Swap Ratio 0.121 No.of shares of bidder for 1 share of target Conservative 20% 10%
Optimistic 25% 15%
value 5252.25 603.5 Crores P/E (average) 10 8
Industry average, P/E 9
Total share 7.45 0.856028369 8.3060284
Comparables (range), P/E 6 to 15
Post takeover P/E 10 9
Post merger P/E 11
No. of years for analysis 5
Net assets of the company 4837 727
 Next five years of share holder wealth
ABC

Year 0 1 2 3 4 5
PAT 553 635.95 731.3425 841.04388 967.2004563 1112.280525
Growth 15% 15% 15% 15% 15% 15%
EPS 74.2281879 85.36241611 98.166779 112.8918 129.8255646 149.2993993
PE 10 10 10 10 10 10
Price 742.281879 853.6241611 981.66779 1128.918 1298.255646 1492.993993

XYZ Wealth
0 1 2 3 4 5
Year 0 1 2 3 4 5 Bidder 12.94% 35.52% 62.63% 95.15% 134.19% 181.02%
Target 12.13% 34.55% 61.46% 93.76% 132.51% 179.01%
PAT 80 84 88.2 92.61 97.2405 102.102525
Growth 5% 5% 5% 5% 5% 5%
EPS 11.2676056 11.83098592 12.422535 13.043662 13.69584507 14.38063732
PE 8 8 8 8 8 8
Price 90.1408451 94.64788732 99.380282 104.3493 109.5667606 115.0450986

Merged Entity

Year 0 1 2 3 4 5
PAT 633 759.6 911.52 1093.824 1312.5888 1575.10656
Growth 20% 20% 20% 20% 20% 20%
EPS 76.2097084 91.45165009 109.74198 131.69038 158.0284514 189.6341416
PE 11 11 11 11 11 11
Price 838.306792 1005.968151 1207.1618 1448.5941 1738.312965 2085.975558
 Q3 Given that they have decided the valuation of XYZ on the basis of Rs. 190 per share, at what rate XYZ
earnings (PAT) should grow to justify this price in a merger transaction? (This means valuation of XYZ for Rs. 190
per share multiplied by 7.1 crores). ABC

Year 0 1 2 3 4 5
ABC XYZ PAT 553 635.95 731.3425 841.04388 967.2004563 1112.280525
Price 705.00 190 Growth 15% 15% 15% 15% 15% 15%
EPS 74.23 11.27 EPS 74.2281879 85.36241611 98.166779 112.8918 129.8255646 149.2993993
PE 9.50 16.86 PE 10 10 10 10 10 10
Swap Ratio 0.26950355 Price 742.281879 853.6241611 981.66779 1128.918 1298.255646 1492.993993
Total shares 7.45 1.913475177 9.3634752
PAT 633 XYZ
EPS 67.6031055
PE 11 Year 0 1 2 3 4 5
PAT 80 84 88.2 92.61 97.2405 102.102525
Price of Merged743.63416
Entity
Growth 5% 5% 5% 5% 5% 5%
Gain to bidder 38.63 5%
EPS 11.2676056 11.83098592 12.422535 13.043662 13.69584507 14.38063732
Price of Earstwhile
200.412043
Target
PE 16.86 16.86 16.86 16.86 16.86 16.86
Gain to target 115.41 136%
Price 190 199.5 209.475 219.94875 230.9461875 242.4934969

Merged Entity
0 1 2 3 4 5
Wealth Bidder 12.94% 35.52% 62.63% 95.15% 134.19% 181.02% Year 0 1 2 3 4 5
target 18.91% 42.69% 71.23% 105.47% 146.57% 195.88%
PAT 633 759.6 911.52 1093.824 1312.5888 1575.10656
Growth 20% 20% 20% 20% 20% 20%
EPS 76.2097084 91.45165009 109.74198 131.69038 158.0284514 189.6341416
PE 11 11 11 11 11 11
Price 838.306792 1005.968151 1207.1618 1448.5941 1738.312965 2085.975558
Q4 Assuming conservative estimates of growth in PAT in both the companies as given above,
ABC
Year 0 1 2 3 4 5
PAT 553 635.95 731.3425 841.04388 967.2004563 1112.280525
Growth 15% 15% 15% 15% 15% 15%
EPS 74.2281879 85.36241611 98.166779 112.8918 129.8255646 149.2993993
PE 10 10 10 10 10 10
Price 742.281879 853.6241611 981.66779 1128.918 1298.255646 1492.993993

XYZ 0 1 2 3 4 5
Year 0 1 2 3 4 5 Wealth Bidder 12.94% 35.52% 62.63% 95.15% 134.19% 181.02%
target 0.07% 20.09% 44.10% 72.92% 107.51% 149.01%
PAT 80 84 88.2 92.61 97.2405 102.102525
Growth 5% 5% 5% 5% 5% 5%
EPS 11.2676056 11.83098592 12.422535 13.043662 13.69584507 14.38063732
PE 8 8 8 8 8 8
Price 101 94.64788732 99.380282 104.3493 109.5667606 115.0450986

The maximum price that should be paid for XYZ is 101 that would create value for XYZ shareholders too

Merged Entity

0 1 2 3 4 5
633 759.6 911.52 1093.824 1312.5888 1575.10656
20% 20% 20% 20% 20% 20%
76.20970841 91.4516501 109.7419801 131.69038 158.02845 189.6341416
11 11 11 11 11 11
838.3067925 1005.96815 1207.161781 1448.5941 1738.313 2085.975558
Q5Given that ABC group is bullish on benefits of merger of XYZ, how should they finance the deal?
Also discuss issues in merger accounting.

ABC XYZ
Net assets of the company
4837 727
NO OF SHARE 7.1 7.45
VALUE PER SHARE 681.267606 97.58389262

ABC HAS HIGH NET ASSETS THEY CAN FINANCE MERGER USING CASH
ABC IS BULLISH BEC XYZ HAS A HIGH VALUE PER SHARE

issues in merger
in a merger the liabilities of the target firm must be stteld
and its owener compested with cash or awarded share or share option in combined entity
Q7 Discuss the strategies risk arbitrageurs should adopt in anticipation of takeover situation.

POISION PILL DEFENSE

A targeted company dilutes its own share there for the hostile cant get controlling without paying extra price

STAGGERED BORD DEFENSE

Split BOD into group and only put a handful up for re election at meeting

white knight defense

sell of key assets to a friend buyer in order to make the company less attractive

greenmail defense
it refers to a trageted repurchased of stock ,when a company buyes stock from another shareholderattempt
usually at a premium with the aims to eliminate an un friendly take over