MERGERS, ACQUISITIONS & CORPORATE RESTRUCTURING

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

Book Value = NET WORTH of the Firm as per B/S

TOTAL ASSETS TOTAL LIABILITIE S

P
TOTAL NUMBER OF ISSUED SHARES
Valuation Approaches Liquidation Value Method

Value that will be derived if the assets and

liabilities of Target Company is Liquidated

(Liquidati on Value of Assets - Cost of Liquidatio n) Total Liabilitie s

P
Total Number Of Issued Shares
Valuation Approaches Replacement Cost Method

Cost to be incurred by Acquiring Company if it were

to replace all the assets of the Target Company

Replacemen t Cost of Assets Total Liabilitie s

P
Total Number Of Issued Shares
Valuation Approaches Price/Earnings Ratio
P/E Multiple signifies the confidence
level of the market on the Company

Market Price Per Share

P/E Ratio
Earning Per Share
EPS Profit After Tax Number of IssuedShares

P P/E Ratio X EPS

Valuation Approaches Dividend Discount Model

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

Infosys 145566 17.05 11.71

Wipro 93808 20.29 14.72

HCL 40064 22.09 11.74

Tech
12404 23.89 12.21
Mahindra
Average 20.99 13.28

TCS is trading at a Premium, as its EV is above the average

Valuation Approaches Comparable Transaction Analysis

Objective is to arrive at the Premium Payable

Valuation Approaches Discounted Cash-Flow Valuation

Estimate the future Free Cash Flows

Estimate the Terminal value
Estimate the appropriate Cost of Capital
Discount the Estimated Cash Flows
Add other Cash Inflows
Subtract other expenses and debt
Find out the Value Per Share by dividing Equity
Value by total number of issued shares
Valuation Approaches Discounted Cash-Flow Valuation

Net Present Value of Future Free Cash Flows - Total Liabilitie s

P
Total Number of Issued Shares
Revise - Valuation Approaches

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

Step 1 Value the firms independently

Step 2 Value of the combined firm,
with no synergy
Step 3 Add the expected growth rate
and cash flows and revalue the
combined firm, i.e., with synergy
Difference between Step 3 and Step 2
is Value of Operating Synergy
Valuing Financial Synergy

Apply the projected benefits into cash flows and compare

it with the value of firms without these benefits
Valuing Corporate Control
Valuing of LBO

Leveraged Buy Out is an acquisition of a company

funded mostly by debt
Valuing of LBO

Steps in Valuing an LBO

Project Cash Flows
Conduct DCF Analysis from the point of view of Financial Sponsor
Conduct a Sensitivity Analysis at different levels of Leverage, Exit Multiples
(EV/EBITDA) and Investment Horizons
Value Creation in an LBO
Efficient Capital Structure
Reduction of WACC, Tax Benefits
Operational Enhancements
Organic Growth, Cost Cutting, Other Synergies
Multiple Expansion
Buy Low, Sell High
Combined Effect
Methods of Financing Mergers

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

No. of shares 250000 175000

New Shares 0 140000

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

No. of shares 1000 400

New Shares 0 200

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

Net Assets Slice 600 Lacs

Maaza 300 Lacs

Net Assets Ratio - 300/600 = 0.5

Exchange Ratio - 0.5 : 1

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

Net Assets Torino 50 Lacs

Citra 100 Lacs

Net Assets Ratio = Net Assets of Target Co / Net Assets of Acquiring Co

Net Assets Ratio - 100/50 = 2

Exchange Ratio -2:1

Determining Exchange Ratio EPS Proportion
Fanta Ltd Sprite Ltd
EPS Rs. 100 Rs. 50

EPS Proportion of Sprite to Fanta - 50/100 = 0.5

Exchange Ratio - 0.5 : 1

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

EPS Proportion of Mountaindew to Thumsup - 109/67 = 1.63

Exchange Ratio - 1.63 : 1

Shareholders of Mountaindew will get 1.63 share of Thumsup for

every share held in Mountaindew
Determining Exchange Ratio Market Price Proportion
Dominos Ltd Pizza Hut Ltd
Market Price Rs. 83 Rs. 44

Market Price Ratio of Pizza Ltd to Dominos Ltd - 44 / 83 = 0.53

Exchange Ratio - 0.53 : 1

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

Exchange Ratio - 2.5 : 1

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

Baasha Ltd Sivaji Ltd

Exchange Ratio 0.5:1
Profit After Tax 2500000 4500000
No. of Equity Shares 250000 180000
Pre-Merger EPS
Pre-Merger EPS Rs. 10 25
Post-Merger PAT
Post Merger PAT 2500000+4500000 = 7000000
Post-Merger No. of shares
Post-Merger No. of shares 250000+90000 = 340000
Post-Merger EPS
Post-Merger EPS Rs. 20.58
Calculate Pre-Merger EPS for both companies
Calculate Post-Merger EPS for acquiring company

Yajamana Ltd Apthamitra Ltd

Exchange Ratio 2 :1
Profit After Tax 1000 Lacs 800 Lacs
No. of Equity Shares 50 Lacs 50 Lacs
EPS 1000/50 800/50
Pre-Merger EPS Rs. 20 16
Post-Merger PAT
Post Merger PAT 1800
Post-Merger No. of shares
Post-Merger No. of shares 150
Post-Merger EPS
Post-Merger EPS Rs. 12
EPS Management

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

1. What is the present EPS of both companies?

2. If Maggi Ltd, takes over Knorr Ltd, what would be the new EPS of Maggi
Ltd? (Assume the exchange ratio is based on current market price?
3. What should be the Exchange Ratio, if Knorr Ltd wants to ensure the same
earnings after merger to members as before merger?
 Brookebond Cothas
PAT Rs. Lacs 1000 200
No. of shares in lacs 100 50
EPS Rs. 10 4
P/E Ratio times 10 5

1. What is the swap ratio based on current market price?

2. What is the EPS of Brookebond after acquisition?
3. What is the expected market price per share of Brookebond after merger
assuming the P/E ratio of Brookebond remains unchanged?
4. Determine the market value of the merged firm?
5. Calculate the gain or loss for shareholders of the two independent
companies after merger?
 MTR Ruchi
PAT Rs. Lacs 150 30
No of shares in lacs 25 8
EPS Rs 6 3.75
Market Price per share Rs. 78 33.75

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

Deferred Payment (Earn-Out)

Payment based on Earning after Merger

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
After Tax Operating Profit
Plus Non-Cash Expenses
(Depreciation/Amortization)
Less Additional Capital Investment
Less Investment in Working Capital
2. Discount at Cost of Capital
3. Compare with Cost of Acquisition
Payment to Target Companys Shareholders
Plus Payment to Target Companys Debenture
holders
Plus Payment towards other External Liabilities
Plus Estimated value of other obligations
Plus Liquidation Expenses
Less Cash Realization
Revise What Weve Learnt