MERGER & ACQUISITION

GSN
 MERGER

• Merger is defined as a combination of two or more companies into a single

company where one survives and other loses their existence.
• Forms of Merger: Merger by absorption, Merger by consolidation
• Merger by absorption: Out of 2, one entity remains
• Merger by Consolidation: Creation of New entity
• It involves a variety of complexities and risks.
 TYPE OF MERGER

• Horizontal Merger – combining similar lines of business

• Vertical Merger – Either further up or down the supply chain
• Conglomerate merger – Unrelated business
 ACQUISITION

• Act of acquiring control in another entity.

• Both the companies A and B exists and no new company is formed unlike merger where
new company is formed.
• Control can be from 51% - 100%
 ACQUISITION: TAKEOVER

• Hostile takeover – Board disapproves takeover

• Friendly takeover – Board approves takeover
REASONS FOR M&A
• Inorganic expansion
• Diversification
• Wealth maximization
• Increasing market share
• Gaining access to unique capabilities
• Improve performance
• Personal benefit for managers
• Tax benefit
• Unlocking hidden value for struggling company
• International presence
CHALLENGES IN M&A

• Employee retention
• Culture
• Communication
 MERITS & DEMERITS OF M&A

Merits Demerits
Cost Savings (Synergy) Overpaying
Revenue Enhancement Large expenses associated with the investment
Increase Market Share
Enhance Financial Resources
POST OFFER DEFENSE MECHANISM

• Say No
• Litigation
• White knight
 COMPARABLE COMPANY VALUATION

Company Statistics Target Comparable Comparable Comparable

Co. Co. 1 Co. 2 Co. 3
Market price - 50 100 200
EPS 1 5 9 21
Book Value per share 5 25 45 110
Cash flow per share 10 50 90 205
Sales per share 100 500 950 2050
 RELATIVE VLAUE MEASURE

Company Comparable Comparable Comparable Mean

Statistics Co. 1 Co. 2 Co. 3

Market price 50 100 200 -

P/E 10 11.1 9.5 10.2
P/B 2 2.2 1.8 2
P/CF 1 1.1 0.98 1.03
P/S 0.1 0.11 0.098 0.102
 CALCULATION OF SHARE PRICE OF TARGET CO.

Company Statistics Target Co Relative Value Mean Estimated

(a) Measure (b) Stock Price
(a×b)
EPS 1 P/E 10.2 10.2
Book Value per share 5 P/B 2 10
Cash flow per share 10 P/CF 1.03 10.3
Sales per share 100 P/S 0.102 10.2
Mean estimated stock price 10.17
Mean Takeover premium 20%
Takeover price of Target Co. (10.17×1.2)=
12.2
 COMPARABLE TAKEOVER TRANSACTION

Company Statistics Target Co. Comparable Comparable Comparable

Co. 1 Co. 2 Co. 3
Deal price per share - 50 100 200
EPS 50 10 20 40
Book Value per share 125 25 45 110
Cash flow per share 240 50 90 210
Sales per share 2,500 500 900 2100
 Company Target Relative Mean Estimated Stock
Statistics Co. Value (b) Price
(a) Measure (a×b)
EPS 50 P/E 5 250
Book Value per 125 P/B 2 250
share
Cash flow per 240 P/CF 1.02 245
share
Sales per share 2,500 P/S 0.102 255
Mean estimated stock price 250
Stock Price including 10% premium 275
POST MERGER VALUE OF AN ACQUIRER/COMBINED
COMPANY

VAT = VA+VT+S-C
Where,
VAT = Post merger value of the combined company (Acquirer+Target)
VA = Pre merger value of acquirer
VT = Pre merger value of Target
S = Synergies created by merger
C = Cash paid to target shareholders
FORMS OF PAYMENT

• Cash offer
• Stock offer
• Mixed offer
GAIN FOR THE ACQUIRER AND TARGET

• Acquirer’s Gain = Synergies – Premium

• Target Shareholders’ Gain = premium
 CASH OFFER

S.M & Co. makes a cash offer to acquire G.R & Co. at Rs.15 per share of G.R’s stock. The
synergies from this merger is estimated to be Rs. 200 million.
Particulars S.M & Co. G.R & Co.

Pre-merger stock price Rs. 20 Rs. 12

No. of outstanding shares 100 50

(in million)
Pre-merger market value 2,000 600
(in million)

Calculate the following:

a) The gain to G.R & Company’s shareholder
b) The gain to S.M & Company’s shareholder
c) The post merger value of S.M & Co.
 CASH OFFER (cont.)
Gain to G.R & Company’s Shareholder
Target Shareholders’ Gain = premium
Pre-merger market value = 600 million
Cash paid to G.R’s shareholders = Rs.15 × 50 million = 750 million
Premium = 750 million – 600 million = 150 million
Gain to S.M & Company’s shareholder
Acquirer’s Gain = Synergies – Premium
S.M & Co. shareholders’ gain = 200 million – 150 million = 50 million
Post Merger Value of S.M & Co.
VAT = VA+VT+S-C
Post merger value of S.M & Co. = 2,000m + 600m + 200m - 750m = 2,050 million
Price per share = 2,050m/100m = Rs. 20.5
 STOCK OFFER
S.M & Co. makes a stock offer to acquire G.R & Co. where the equity swap ratio is 3:4,
meaning 3 shares of S.M for every 4 shares of G.R held. The synergies from this merger is
estimated to be Rs. 200 million.
Particulars S.M & Co. G.R & Co.

Pre-merger stock price Rs. 20 Rs. 12

No. of outstanding shares (in 100 50
million)
Pre-merger market value 2,000 600
(in million)
Calculate the following:
a) The post merger value of S.M & Company
b) The gain to G.R & Company’s shareholders
c) The gain to S.M & Company’s shareholders
 STOCK OFFER (cont.)
Post merger Value of S.M & Company
No.of new S.M shares issued = 50m/4×3 =37.5 million
VAT = VA+VT+S-C
Post merger value of S.M & Co. = 2,000m + 600m + 200m – 0m = 2,800 million
Gain to G.R & Company’s Shareholders
Pre-merger market value = 600 million
No. of shares given to G.R’s shareholders = 37.5 million
Share price = 2,800 million / 137.5 million shares = Rs.20.36
Post merger market value = 37.5m × Rs.20.36 =763.5 million
Premium = 763.5 million - 600 million = 163.5 million
Gain to S.M & Company’s Shareholders
Acquirer’s Gain = Synergies – Premium
Gain to S.M & Company’s Shareholders = 200 m – 163.5 m = 36.5 million
 MIXED OFFER
S.M & Co. makes a mixed offer to acquire G.R & Co. where S.M will pay Rs. 8 and give 3
shares of S.M for every 10 shares of G.R held. The synergies from this merger is
estimated to be Rs. 200 million.
Particulars S.M & Co. G.R & Co.
Pre-merger stock price Rs. 20 Rs. 12
No. of outstanding shares (in million) 100 50
Pre-merger market value 2,000 600
(in million)

Calculate the following:

a) The post merger value of S.M & Company
b) The gain to G.R & Company’s shareholders
c) The gain to S.M & Company’s shareholders
 MIXED OFFER (cont.)
Post Merger Value of S.M & Company
VAT = VA+VT+S-C
Cash paid to G.R & Co. shareholders = Rs.8 × 50 m = 400 million
Post merger value of S.M & Co. = 2,000m + 600m + 200m – 400m = 2,400 million
Gain to G.R & Company’s Shareholders
Pre-merger market value = 600 million
No. of shares given to G.R’s shareholders = 50m/10 × 3= 15 million
Share price = 2,400 million / 115 million shares = Rs. 20.87
Post merger market value = 15 m × Rs.20.87 =313 million
Cash paid to G.R & Co. shareholders = Rs.8 × 50 m = 400 million
Premium = (313m + 400m) – 600m = 113 million
Gain to S.M & Company’s Shareholders
Acquirer’s Gain = Synergies – Premium
Gain to S.M & Company’s Shareholders = 200 m – 113m = 87 million
 BID COMPARISON

Particulars Cash Offer Stock Offer Mixed Offer

Combined Post 2,050 million 2,800 million 2,400 million

merger value (Rs. 20.5 per share) (Rs. 20.36 per share) (Rs. 20.87 per share)

S.M Shareholders’ 50 million 36.5 million 87 million

gain
G.R Shareholder’s 150 million 163.5 million 113 million
gain
 VALUE CREATION IN MERGER

• Most of the M&A failed to create value

• Strong Acquirer
• Low Premium
• Few Bidders
• Favourable Market condition