M&A – Practice Problems

1. A acquire B with shares at an exchange price of Rs.40. The other financial details
of both companies are given below:

Particulars A B

Present earnings 20 million 6 million

EPS 3.33 3.00
Market Price 60 30
P/E 18 10
No of shares 6 million 2 million

Analyse the EPS and market value impact on A owing to this acquisition.

Working:

Total earnings of the merged entity = Rs. 26 million

Exchange ratio = Rs.40/60 =.67
New shares of A issued = .67 x 2000000 = 1,333,333
Total shares O/S of the merged entity = 7,333,333
EPS of the merged entity = 26 000,000/7,333,333= 3.55
PE of acquiring entity = 18
Market price per share = 3.55 x 18 = Rs.63.90
2. Value Ltd is intending to acquire Gain Ltd and the following information is
available in respect of both the companies.

Value Gain
Total current earnings Rs. 2.5 million Rs.0.9 million
No: of o/s shares Rs 0.5 million Rs. 0.3 million
Market price per share Rs. 21 Rs. 14

a. What is the present EPS of both the companies?

b. If the proposed merger happens what would be the new EPS for Value Ltd.
(assuming the merger takes place by exchange of equity shares and the
exchange ratio is based on the current market price)
c. What should be the exchange ratio if Gain Ltd want to ensure the same
earnings to members as before the merger?

Working:
a. EPS Value = 2500000/500000 = Rs. 5
EPS Gain = 900000/300000 = Rs. 3

b. Ex Ratio = 14/21 = .66666

Total no: of shares issued = 14/21 x 300000 =200000 shares
Total no of shares post merger = 500000+200000 = 700000
New EPS = 3400000/700000 = Rs. 4.86

c. Exchange ratio based on EPS = 3/5 = .60

Total shares receivable by ABC = .6 X 300000 = 180000
Total no of shares post merger = 500000 + 180000 = 680000
EPS post merger = 3400000/680000 = Rs. 5
3. RIL is considering a takeover of SIL. The particulars of 2 companies are given
below:
RIL SIL
Earnings after tax Rs.2000000 Rs.1000000
No: of o/s shares 1000000 1000000
EPS Rs.2 Re.1
PE Ratio 10 5

What is the market value of each company before merger?

a. Assume that the management of RIL estimates that the shareholders of SIL
will accept an offer of one share of RIL for four share of SIL. If there are no
synergic effects 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?
b. Due to synergic effects, assume that the management of RIL estimates that
the earnings will increase 20%, what is the new post merger EPS and price per
share? Will the shareholders be better or worse off than they were before the
merger?

a. Current market value of RIL

EPS X PE = 2 X 10 =20
Market value = 20x1000000 = Rs. 2 Crores
Current market value of SIL
EPS X PE = 1X5 = 5
Market value of SIL = 5X1000000 = Rs.0.5 Crores

b. Exchange ratio = 1 share of RIl for every four shares of SIL

No of RIL shares available in exchange = 1000000/4 = 250000

Post merger EPS of RIL = 2000000+1000000/(1000000+250000) = 2.4

Expected market price per share of RIL = EPS X PE = 2.4X10=Rs 24

Market value of RIL post merger = 24 x 1250000 = Rs 3 Crores

The share holders of RIL are better off after the merger.

c. With synergic effects, the new EPS would be:

Post merger EPS of RIL = (2000000+1000000)/(1250000) x 1.2 = 2.88

Expected market price after merger = EPS x PE = 2.88 X10 = Rs. 28.8

Market value of RIL after merger = 28.8 x 1250000 = Rs. 3.60 Crores