Valuation for Mergers &

Acquisitions- Including
Case Studies

- CA Parag Ved
December 27, 2014

M & A Introduction
Liberalization of economy and reforms programmes have
resulted in a 'churn' in the industrial and services sector.
Companies are resorting to acquisitions as a means to
consolidate and grow rapidly.
Globalization has given importance to size for competing
effectively with the multinationals and exploring the world
markets.
As a result, there is a manifold increase in the level of M &
A activity.

Corporate Restructuring
Corporate Restructuring
It is significant modification made to the debt, operations or
structure of a company.
This type of corporate action is usually made when there are
significant problems in a company, which are causing some
form of financial harm and putting the overall business in
jeopardy.
The
hope
is
a
company
can
improve the business

that
eliminate

through
financial

restructuring,
harm
and

Motives for Restructuring

Achieve Growth
And
Survive

Gain Better
Competitive
Position

Strategic Reasons

Focus on
Core Activities

Achieve
Economies of
Scale
Cont

Motives for Restructuring (cont.)

Dividend
Distribution Tax
minimisation

Fund Raising

Financial Reasons

Utilisation of
Excess Cash

Tax Planning &

Reducing Costs
Cont

Motives for Restructuring (cont.)

Diversification
Entering into a
new segment

Bail Out
Takeovers

Other Reasons

Family
Separation

Warding-off
Predators

Modes of Restructuring
M&A

Acquisitions

Asset
Purchase
Slump
Sale

Mergers

Share
Purchase
Itemized
Sale

Demergers

Subsidiar isation

Capital
Reduction

Others

Buy-Back

Acquisitions / Takeovers
Acquisitions / Takeovers:

An acquisition, also known as a takeover, is the buying of one

company (the target) by another.
Types:

Asset Purchase:
Purchase: This type of transaction leaves the target
company as an empty shell. It is further divided into:
a) Slump Sale
b) Itemised Sale
Share purchase:
purchase: The buyer buys the shares, and therefore
control, of the target company

Examples: Reliance Industries acquiring 95% in Infotel

Broadband Pvt. Ltd.
Cont

Acquisitions / Takeovers (cont.)

Slump Sale:
Sale: Section 2(42C) of the Income Tax Act, 1961 defines
Slump Sale as the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without values
being assigned to the individual assets and liabilities.

Example: Grasim sold sponge iron unit to Welspun

Power for Rs. 1030 crores.

Itemised Sale:
Sale: Sale of assets & liabilities with values assigned
separately for each item of assets & liabilities.
Slump Sale vs.
vs. Itemised Sale:
Sale: In case of itemised sale, unlike
slump sale, it is possible to pick and choose assets and
liabilities. Also, the consideration is identifiable against each
item.

Warren Buffetts criteria for Business

Acquisition
A Business We Understand;
Favorable Long Term Economics;
Able and Trustworthy Management; and
A Sensible Price Tag

Source : 2007 letter to Shareholders.

Role of Finance Team in the Process

of Acquisition
Partner in growth
Make independent assessment
Avoid Goal seek
Protect interest of all stakeholders
Ensure adherence to all the laws/ regulations
Follow proper Corporate Governance

MERGER

Mergers
Mergers:

In business or economics a merger is a combination of two

companies into one larger company.
Types:

Horizontal mergers take place where the two merging

companies produce similar product in the same industry

Vertical mergers occur when two firms, each working at

different stages in the production of the same good,
combine.

Conglomerate mergers take place when the two firms

operate in different industries.

Forward Merger of target into the acquirer

Reverse Merger of acquirer into the target

DEMERGER

Demergers
Demerger:

corporate strategy to sell off subsidiaries or divisions of a company

Pre

Undertaking A

Post

AB Ltd

Undertaking B

Undertaking A

AB Ltd

Assets, liabilities
of
undertaking B
transferred to B
Ltd.

Undertaking B

B Ltd

Valuation Concept

Value Price

Valuation not an exact Science, More of Art and

Subjective assessment

Value varies with situations

Date specific

Purchase /
Sale of
Business

Merger/
Demerger

Private
Equity

Buyback of
Shares

Test of
Impairment/
IFRS

IPO/ FPO

Why
Valuation?

Litigation

Family
Separation

PPA

Regulatory
Approval

Portfolio Value
of Investments

Steps in Valuation

Obtaining information

Management Discussion and

Industry Overview

Data analysis and review

Selection of method

Applying Method

Conducting sensitivities on
assumptions

Assigning Weights

Recommendation

Reporting

Sources of Information

Historical data such as audited results

of the company

Future projections

Stock market quotations

Discussions with the management of

the company

Representation by the management

Data on comparable companies

Market surveys, news paper reports

Analysis of Company

SWOT Analysis

Profitability Analysis- Past and

vis--vis industry

Ratio Analysis

P&L Ratios


Expense & Profitability ratios

Balance Sheet Ratios



Quick Ratio/ Current Ratio

Turnover Ratios

Liquidity Ratios

Debt Equity- of Company &

Industry

Principal Methods of Valuation

Earning based approach
Discounted Cash Flow
Earnings Multiple Method

Market Approach
Market Price
Market Comparables

Asset Based Approach

Net Assets Method
Replacement Value/Realisable Value

Common Adjustments
Following adjustments may be called for:

Investments

Surplus Assets

Auditors Qualification

Preference Shares

ESOPs / Warrants

Contingent Liabilities/Assets

Tax concessions

Findings of Due Diligence Reviews

Discounted Cash Flow (DCF)

Considers Cash Flow and Not

Profits

Cash is King

Free Cash Flow (FCF)



FCF to Firm

FCF to Equity

DCF Parameters
Cash Flows

Projections

Horizon period

Growth rate

Discounting
 Cost of Equity
 Cost of Debt
 Weighted Average Cost of
Capital (WACC)

Cash Flows

Business
Plan
Business
Cycle
Capital
Expenditure

Working
Capital

Depreciation
Amortization

Tax

DCF - Projections
Factors to be considered for reviewing
projections:

Industry/Company Analysis

Dependence on single customer/ supplier

Installed capacity

Existing policy/ legal framework

Capital expenditure increasing capacities

Working capital requirements

Alternate scenarios / sensitivities

DCF Discounting
Weighted Average Cost of Capital (WACC)
WACC =

D
(D + E)

Kd

D = Debt
E = Equity
Kd = Post tax cost of debt
Ke = Cost of equity

E
x Ke
(D + E)

DCF - Terminal value

Terminal Value is the residual value of business at the
end of projection period used in discounted cash flow
method.
Terminal Value

Liquidation
Approach

Multiple
Approach

Stable Growth
Approach

29

DCF An Example
Particulars
Operating PBT
Add: Inflows
Interest
Depreciation
Total Inflows
Less: Outflows
Capital Expenditure
Incremental Working Capital
Tax
Total Outflows
Free Cash Flows (FCF)
Free Cash Flow for 2016-17
Growth Rate
Capitalised Value for Perpetuity
Discounting Factor
13.50%
Net Present Value of Cash Flows
Enterprise Value
Less: Loan Funds
Less: Contingent Liabilities
Less: Preference Share Capital
Add: Surplus Funds
Add: Value of Investments
Adjusted Value for Equity Shareholders
No. of Equity Shares
Value per share (FV Rs. 10)

(Rs. In Mn)
2014-15 2015-16 2016-17 2017-18 2018-19 Perpetuity
170
187
205
226
248
69
81
320

70
85
342

72
90
367

73
94
393

75
99
422

25
39
77
141
179

25
49
83
157
185

50
61
90
201
166

25
54
97
176
217

25
62
105
192
230

0.88
158

0.78
144

0.68
113

0.60
131

0.53
122

230
3%
2,257
0.53
1,198
1,866
(350)
(50)
(800)
120
1,000
1,786
7,969,000
224

Earnings Multiple Method

Commonly used Multiples
Price to Earnings
Multiple:

Market Cap/PAT

Enterprise Value
to EBITDA
Multiple:

Enterprise Value/EBITDA

Sales Multiple:

Enterprise Value/Sales

Enterprise Value/EBITDA Multiple Method

Determination of Maintainable EBIDTA

Capitalisation Rate/Multiple
Not affected by the pattern of Funding
adopted by Company/ Comparable
Companies

Enterprise Value/EBITDA Multiple Method

Based on
projections

past

Non-recurring
excluded

EBIDTA of various years are averaged

(simple or weighted). Current EBIDTA is
accorded the highest weight

Projected EBIDTA discounted for inflation

Finally appropriate multiple is applied to

arrive at the value

&

performance

and

extraordinary

/or
items

Multiples

Multiples to be applied represent the growth

prospects/ expectations of the Company

Factors to be considered while deciding the

multiple:


Past and Expected Growth of the Earnings

Performance vis--vis Peers

Size & Market Share

Historical Multiples enjoyed on the

Exchange by the Company and its peers

Stock

EV/EBIDTA An Example
Calculation of Adjusted PBT & EBIDTA
Particulars
Reported PBT

(Rs. in Mn.)
2011-12 2012-13 2013-14
98
116
136

Less: Non recurring / Non operating Income

Profit on sale of investments
Dividend Income
Profit on sale of fixed assets
Interest Income
Other income
Total of Non Recurring Income
Add: Non recurring Expenditure
VRS written off
Preliminary Expenditure
Loss on sale of fixed assets
Amortisation of Share Issue Expenses
One time settlement amount paid to third party
Total of Non Recurring Expenditure
Adjusted PBT
Add: Interest
Add: Depreciation
Adjusted EBIDTA

28
25
4
7
10
74

17
15

18
15
20

9
10
51

7
15

8
15
15
10

10
-

32
56
59
70
185

48
113
63
75
251

10
63

9
15
10
58
92
165
65
79
309

EV/EBIDTA An Example
Particulars
2011-12
2012-13
2013-14
Total
Maintainable EBIDTA
EBIDTA Multiple
Capitalised Value
Adjustments
Less: Loan funds
Less: Preference Share Capital
Add: Value of Investments
Less: Contingent Liabilities
Add: Surplus Funds
Equity Value
No. of Equity Shares
Value per Share (FV Rs. 10 )

(Rs. in Mn.)
Adj. EBIDTA Weight Product
185
1
185
251
2
501
309
3
927
6
1,613
269
7
1,882

(350)
(800)
1,000
(50)
120
1,802
7,969,000
226

Market Price Approach

Evaluates the value on the basis of prices quoted on

the stock exchange

Thinly traded / Dormant Scrip Low Floating Stock

Significant and Unusual fluctuations in the Market Price

It is prudent to take weighted average of quoted

price for past 6 months

Regulatory bodies often consider market value as

important basis Preferential allotment, Buyback,
Takeover Code

Market Price Method An Example

Month
June 2014
July 2014
August 2014
September 2014
October 2014
November 2014
Total
Value per Share (in Rs.)

Volume

Turnover

30,747,312
12,040,227
19,663,244
16,118,953
18,115,567
29,408,604
126,093,907

4,009,275,753
2,697,868,740
3,976,264,011
3,503,216,645
4,767,062,216
6,535,415,743
25,489,103,108
202

Market Comparables

Generally applied in case of unlisted

entities

Estimates value by relating an element

with underlying element of similar
listed companies.

Based on market multiples of

Comparable Companies


Book Value Multiples

Industry Specific Multiples

Multiples from Recent M&A Transactions.

NAV Formula
The Value as per Net Asset Method is arrived as follows:
Total Assets
(excluding Miscellaneous Expenditure and debit balance
in Profit & Loss Account)
Less: Total Liabilities
NET ASSET VALUE
OR
Share Capital
Add: Reserves
Less: Miscellaneous Expenditure
Less: Debit Balance in Profit & Loss Account
NET ASSET VALUE

NAV An Example
Particulars
Net Fixed Assets
Investments
Deferred Tax Asset (Net)
Current Assets,Loans & Advances
Current Liabilities & Provisioins
Net Current Assets
Loan Funds
Net Assets Value
Add/ (Less): Adjustments
Appreciation in value of Investments
Contingent Liabilities
Preference Share Capital
Adjusted Net Assets
No. of Equity Shares (FV - Rs. 10 each)
Net Assets Value per Share

(Rs. in Mn.)
Amount
Amount
700
950
20
1,290
(960)
330
(350)
1,650
50
(50)
(800)
850
7,969,000
107

Selection of Methods
Situation
Knowledge based companies
Manufacturing Companies

Approach

Earnings/Market
Earnings/ Market/ Asset

Brand Driven companies

Earnings/Market

A Matured company

Earnings/Market

Investment/Property companies

Asset

Company going for liquidation

Asset

Generally Market Approach is used in Combination

with other methods or as a cross check

Reaching a Recommendation

Methods throw a range of values

Consider the relevance of each methodology

depending upon the purpose and premise of
valuation
Mathematical weightage
Professional judgment
Subjective Value

Fair Value

Method
Net Assets Method
EV/ EBIDTA Method
DCF Method
Market Price Method
Total
Fair Value per share (in Rs.)

Value per
Share (In Rs.)
107
226
224
202

Weight

1
1
1
2
5

(In Rs.)
Product (In
Rs.)
107
226
224
404
961
192

Other Value Drivers

Final Value

Final Price is a result of negotiations

Documentation

Appointment Letter
 Purpose & Scope of Valuation
 Valuation Date
 Commonly used Methodologies
 Timelines
 Fees
 Limitations
Representation Letter
 No material omissions on part of the
management
 Confirmation of all inputs/ information used in
the valuation
 Responsibility for providing information lies
with Management

Valuation Report

Introduction/ Background

Purpose of Valuation

Key Financials

Sources of Information

Methodologies of Valuation

Important consideration & assumptions

Valuation Workings

Fair Value Recommendation

Exclusions and Limitations

Case Study on Valuation

for Merger

Before Merger

Shareholders of X

Shareholders of Y

X Ltd

Y Ltd

49

After Merger
Option 1

Option 2

Option 3

Shareholders
of X & Y

Shareholders
of X & Y

Shareholders
of X & Y

X Ltd

Y Ltd

New Co. Z

Note- Based on the swap ratio, the shareholders of the transferor

company are issued shares of transferee company

50

Exchange Ratio

The Exchange Ratio is simply

the number of Transferee Co.s
shares that are to be issued to
the shareholders of Transferor
Co. as consideration for the
merger

Depends upon the valuation

of businesses of the Transferor
and Transferee Companies

Exchange Ratio
(In Rs.)
Method
Net Assets Method
EV/ EBIDTA Method
Market Price Method
Total
Fair Value per share (in Rs.)

Company A
Company B
Value per Weight Product Value per Weight Product
Share
Share
28
72
63

1
2
2
5

28
144
126
298
60

Ratio: For 3 Shares of Company B, 2 Shares of Company A

30
42
43

1
2
2
5

30
84
86
200
40

Case Laws
Exchange Ratio not disturbed by Courts unless objected
and found grossly unfair

Miheer

H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com

Cases 792

Dinesh

v. Lakhani Vs. Parke-Davis (India) Ltd. (2003) 47

SCL 80 (Bom)

Valuation will take into account number of factors such

as prospective yield, marketability, the general outlook for
the type of business of the company, etc. Mathematical
certainty is not demanded, nor indeed is it possible

Viscount

Simon Bd in Gold Coast Selection Trust Ltd. vs.

Humphrey reported in 30 TC 209 (House of Lords)

Case Laws
It is fair to use combination of three well known methods asset value, yield value & market value

Hindustan

Lever Employees Union Vs. HLL (1995) 83 Com. Case

30 SC
Valuation job must be entrusted to people who know the
Company rather than giving to outsiders who will start
from scratch

Consolidated

Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)

Cont

Some Issues

Relying on Technical Valuers Report

Joint Reports

Fairness Opinion by Merchant Bankers

Engagement Letter

Management Representations

Reporting

Valuation is not an
objective exercise.
Any preconceptions
and biases that an analyst
brings to the process will
find their way into the
value.