FINANCIAL STRATEGY

Assignment No.3
Semester IV

RAHUL – 20MBAR0060
DANYA K – 20MBAR0066
DEEPA K – 20MBAR0170
MAHIMA P – 20MBAR0152
MAHESH – 20MBAR0054
Group Members: BRIJESH – 20MBAR0371

Group Number: 05

Section: IFA

Avenue Super marts Ltd.

Company: Argo Tech Foods Ltd
 1. Suggest a company (listed on BSE/ NSE) that according to you would be a good
acquisition target for Avenue Super marts. Mention whether the acquisition shall
mean a Horizontal / Vertical / Conglomerate integration?

A good acquisition target for Avenue Super marts is with Agro Tech Foods Limited (ATFL).
The merger between the companies is based on vertical merger.

Reason for Vertical merger: D Mart is a one-stop supermarket chain that aims to offer
customers a wide range of basic home and personal products under one roof. Each DMart
store stocks home utility products - including food, toiletries, beauty products, garments,
kitchenware, bed and bath linen, home appliances and more - available at competitive prices
that our customers appreciate. Our core objective is to offer customers good products at great
value.

While, Agro Tech Foods Limited (ATFL) is a public Limited company, engaged in the
business of manufacturing, marketing and selling of a wide range of Food Products and
Edible Oils. The food categories in which the Company competes includes Ready to Cook
Snacks, Ready to Eat snacks, Spreads & Dips, Breakfast Cereals and Chocolate
Confectionery.

2. Will this acquisition create synergy? Highlight what according to you are the
economic reasons that would lead to the synergy of the acquisition?

Economic reasons

Synergy, as defined in the business dictionary, is the state in which two or more agents,
entities, factors, processes, substances, or systems work together in a particularly fruitful way
that produces an effect greater than the sum of their individual effects. Synergy is the magic
force that allows for enhanced cost efficiencies of the new business. Synergy takes the form
of revenue enhancement and cost savings

Few of the reasons are as follows

• Maximize value: Synergy

• Search economies of scale

• Expansion of the range of products and services

 • Business complementarity

• New distribution channels

• Entity size

• Power ambition

• Mimicry

• Reduce uncertainties

• Defensive considerations

 The sources of synergy that result from mergers and acquisitions under the
following headlines:

1. Operating economies which include:

(a) Economies of scale: Horizontal mergers (acquisition of a company in a similar line of

business) are often claimed to reduce costs and therefore increase profits due to economies of
scale. These can occur in the production, marketing or finance divisions. Note that these gains
are not expected automatically and diseconomies of scale may also be experienced. These
benefits are sometimes also claimed for conglomerate mergers (acquisition of companies in
unrelated areas of business) in financial and marketing costs.

(b) Economies of vertical integration: Some acquisitions involve buying out other
companies in the same production chain. For example, a manufacturer buys out a raw
material supplier or a retailer. This can increase profits through eliminating the middleman in
the supply chain.

(c) Complementary resources: It is sometimes argued that by combining the strengths of

two companies a synergistic result can be obtained. For example, combining a company
specializing in research and development with a company strong in the marketing area could
lead to gains. Combining the expertise of both firms would benefit each company through the
gained knowledge and skills that individually they lack.

(d) Elimination of inefficiency: If either of the two companies had been badly managed;
its performance and hence its value can be improved by the elimination of inefficiencies
through M&A. Improvements could be obtained in the areas of production, marketing and
finance.

3. Will this acquisition create synergy? Highlight what according to you are the
economic reasons that would lead to the synergy of the acquisition?

EPS of Avenue super marts 22.84

EPS of Agro Tech Food Limited (ATFL) 8.72

Share Exchange Ratio 8.72/22.84=0.38

*Share Exchange Ratio = EPS of target company/ EPS of acquiring company

Hence, shareholder of Agro tech food limited will get 0.38 share of Avenue Supermarts Ltd
for every share held in Agro tech food limited.

4. What would be the expected Market Value and EPS post acquisition?

Expected Market Value of the Avenue Super marts Ltd. post-acquisition = Market
Capitalisation of Acquiring company + Market Capitalisation of Agro Tech Foods Limited
(ATFL)

Market Capitalisation of Avenue Super marts Ltd. = 2,76,752.02 INR

Market Capitalisation of Agro Tech Foods Ltd = 2,116.47 INR
Expected Market Value of the Avenue Super marts Ltd. post-acquisition = 2,78,868.49

Expected EPS post acquisition = (Current PAT of Avenue Super marts Ltd + Current PAT of
Agro Tech Foods Ltd)/No. of Equity Shares in Avenue Super marts Ltd Post acquisition

Current PAT of Avenue Super marts Ltd = 1099.43 Cr

Current PAT of Agro Tech Foods Ltd = 30.3 Cr
Number of Equity Shares in Avenue Super marts Ltd Post acquisition = No. of Shares of
Avenue Super marts Ltd + (Share Exchange Ratio X No. of Shares of Agro Tech Foods Ltd)
No. of Shares of Avenue Super marts Ltd = 647774691
No. of Shares of Agro Tech Foods Ltd = 24369264
Number of Equity Shares in Avenue Supermarts Ltd Post acquisition = 657035011.3

Expected EPS post acquisition = 1.71944E-06

5. What would be the value benefit of the acquisition to the shareholders of Avenue
Supermarts and to the shareholders of the Target company?

When one company acquires another, the stock prices of both entities tend to move in
predictably opposite directions, at least over the short-term. In most cases, the target
company’s stock rises because the acquiring company pays a premium for the acquisition, in
order to provide an incentive for the target company’s shareholders to approve the takeover.
Simply put, there’s no motive for shareholders to greenlight such action if the takeover bid
equates to a lower stock price than the current price of the target company. Effect on Stock
Prices A merger announcement often sends a stock’s price rising, usually to meet the price
proposed in a takeover bid. However, there can sometimes be uncertainty surrounding the
stock price, especially if there are doubts that the deal can be completed because of investor
financing issues. Also, during hostile takeover attempts, the stock price can also fluctuate if
the management tries to entice friendly investors into the company. Sometimes traders will
try to capitalize on the announcement of mergers by buying the stock before the price rises,
which is called arbitrage. Stock prices can rise on the anticipation of a buyout of a “takeover
target.” Pre-Acquisition Volatility Stock prices of potential target companies tend to rise well
before a merger or acquisition has officially been announced. Even a whispered rumor of a
merger can trigger volatility that can be profitable for investors, who often buy stocks based
on the expectation of a takeover. But there are potential risks in doing this, because if a
takeover rumor fails to come true, the stock price of the target company can precipitously
drop, leaving investors in the lurch. Generally speaking, a takeover suggests that the
acquiring company’s executive team feels optimistic about the target company’s prospects for
long-term earnings growth. And more broadly speaking, an influx of mergers and
acquisitions activity is often viewed by investors as a positive market indicator.
Expected market value of the acquiring company (Avenue supermart limited) post acqusition
– 278868.49

Pre-acqisition no. Of equity shares of acquiring company (Avenue supermart Ltd) -

236151889

No. Of equity shares in acquiring company post acqusition- 657035011.3

Market Capitalisation of Avenue Supermarts Ltd. = 2,76,752.02 INR 278868.49
× 236151889. – 276752.02 = (27573457.02)
657035011.3
Expected market value of the acquiring company post acquisition -2278868.49
Share exchange ratio- 0.38
No. Of shares of target comcompany-24369264
No.of shares in acquiring company post acquisition.-12616619

Pre acqusition market capitalisation of target company – 647774691

2278868.49 × 0.38× 24369264 - 647774691. = (646,102,051.7)

12616619

6. Are the value benefits of the acquisition to the shareholders of Avenue Supermarts and
Target Company in positives? If not, what changes in purchase consideration (share
exchange ratio) can turn them into positive?

Methods of determination of Purchase Consideration

Lump Sum Method: The purchasing company may agree to pay a lump-sum to the
Vendor company on account of the purchase of its business. In fact, this method is not
based on any scientific thoughts and techniques. This method is an unscientific and non-
mathematical method of ascertaining purchase consideration.
Net Worth or Net Assets Method: Under this method, purchase consideration is calculated
byadding up the values of various assets taken over by the purchasing company and then
deducting there from the values of various liabilities taken over by the purchasing company.
Thevalues of assets and liabilities for the purpose of calculation of purchase consideration
are thosewhich are agreed upon between the purchasing company and the vendor company
and not the values at which the various assets and liabilities appear in the Balance Sheet of
the vendor company.
(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net Assets
The following relevant points are to be noted while ascertaining the purchase price

a. If the transferee company agrees to take over all the assets of the transferor company,
it would mean inclusive of cash and Bank balances.
b. The term all assets, however, does not include fictitious assets, like Debit balance of
Profit and Loss Account, Preliminary Expenses
Account, Discount and other expenses on issue of shares and Debentures,
Advertising Expenses Account etc.
c. Any specific asset, not taken over by transferee company, should be ignored while
computing the purchase price,
d. If there is any goodwill, pre-paid expenses etc. the same are to be included in the
assets taken over unless otherwise stated,
e. The term liabilities will always signify all liabilities to third parties. Trade liabilities

are those incurred for the purchase of goods such as Trade Creditors or Bills

Payable,

f. Other liabilities like Bank Overdrafts, Tax payable, Outstanding expenses etc. are not
a part oftrade liabilities.

g. Liabilities do not include accumulated or undistributed profits like, General Reserve,

Securities Premium, Workmen Accident Fund, Insurance Fund, Capital Reserve,
Dividend Equalization Fund etc.

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