Valuation of M&A Deals

Valuation of mergers and acquisitions
Title page
1
Table of Contents
2
ACKNOWLEDGEMENT
I feel highly privileged to express my sincere gratitude to my economics professor PANKAJ

UPADHAY for his able guidance and help in preparing this project. His never failing patience
and much needed cooperation proved to be an asset to me in accomplishing my task. Without his
constant encouragement, generosity and valuable critical comments this study would not have
reached its present form. Once again I feel eternally obliged to him.
I am also delighted to acknowledge the library staff of IIPM New Delhi.
Last but not least, I pay my gratitude to my family and friends for their continuous
encouragement and support.
3
ABSTRACT
Corporate mergers and acquisitions (M&As) have become popular across the globe during the
last two decades thanks to globalization, liberalization, technological developments and intensely
competitive business environment. The synergistic gains from M&As may result from more
efficient management, economies of scale, more profitable use of assets, exploitation of
market power, and the use of complementary resources.
Interestingly, the results of many empirical studies show that M&As fail to create value for the
shareholders of acquirers. In this backdrop, the paper discusses the causes for the failure
of M&As by drawing the results of the following areas.
This paper is an attempt to evaluate the impact of Mergers on the performance of the
companies. Theoretically it is assumed that Mergers improves the performance of the
company due to increased market power, Synergy impact and various other qualitative and
quantitative factors. Although the various studies done in the past showed totally opposite
results. Four parameters; Total performance improvement, Economies of scale, Operating
Synergy and Financial Synergy. My paper shows that Indian companies are no different than the
companies in other part of the world and mergers were failed to contribute positively in the
performance improvement.
4
Introduction
M&A are very important tools of corporate growth. A firm can achieve growth in several ways.
It can grow internally or externally Internal Growth can be achieved if a firm expands its existing
activities by up scaling capacities or establishing new firm with fresh investments in existing
product markets. It can grow internally by setting its own units in to new market or new product.
But if a firm wants to grow internally it can face certain problems like the size of the existing
market may be limited or the existing product may not have growth potential in future or there
may be government restriction on capacity enhancement.
Also firm may not have specialized knowledge to enter in to new product/ market and above all
it takes a longer period to establish own units and yield positive return. One alternative way to
achieve growth is resort to external arrangements like Mergers and Acquisitions, Takeover or
Joint Ventures. External alternatives of corporate growth have certain advantages.
In case of diversified mergers firm can use resources and infrastructure that are already there in
place. While in case of congeneric mergers it can avoid duplication of various activities and thus
can achieve operating and financial efficiency M&A has become a daily transaction now-a-days.
Mergers and acquisitions are an important area of capital market activity in restructuring a
corporation and had lately become one of the favored routes for growth and consolidation. The
reasons to merge, amalgamate and acquire are varied, ranging from acquiring market share to
restructuring the corporation to meet global competition. One of the largest and most difficult
parts of a business merger is the successful integration of the enterprise networks of the merger
partners.
The main objective of each firm is to gain profits. M&A has a great scope in sectors like
steel, aluminum, cement, auto, banking & finance, computer software, pharmaceuticals,
consumer durable food products, textiles etc. It is an indispensable strategic tool for
expanding product portfolio’s, entering into new market, acquiring new technologies and
building new generation organization with power & resources to compete on global basis.
With the increasing number of Indian companies opting for mergers and acquisitions, India is
now one of the leading nations in the world in terms of mergers and acquisitions. Till few years
ago,rarely did Indian companies bid for American-European entities.
Today, because of the buoyant Indian economy, supportive government policies and dynamic
leadership of Indian organizations, the world has witnessed a new trend in acquisitions. Indian
5
companies are now aggressively looking at North American and European markets to spread
their wings and become global players. Almost 85 per cent of Indian firms are using
Mergers and Acquisitions as a core growth strategy..
Merger:
Merger is defined as combination of two or more companies into a single company
where one survives and the others lose their corporate existence. The survivor acquires all the
assets as well as liabilities of the merged company or companies. Generally, the surviving
company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:
1)Equity shares in the transferee company,
2) Debentures in the transferee company,
3) Cash, or
4)A mix of the above modes.
Classifications Mergers and Acquisitions
1) Horizontal
a)A merger in which two firms in the same industry combine.

b)Often in an attempt to achieve economies of scale and/or scope.
2) Vertical
a) A merger in which one firm acquires a supplier or another firm that is closer to its existing
customers.
b) Often in an attempt to control supply or distribution channels.
6
3) Conglomerate
a) A merger in which two firms in unrelated businesses combine.

b) Purpose is often to ‘diversify’ the company by combining uncorrelated assets
and income streams
4) Cross-border (International) M&As
Acquisition:
A merger or acquisition involving a Canadian and a foreign firm an either the
acquiring or target company.
Acquisition in general sense is acquiring the ownership in the property. In the context
of business combinations, an acquisition is the purchase by one company of a controlling
interest in the share capital of another existing company.
Types of acquisition
There are two types of business acquisitions
1) Friendly acquisition- In this a company invites other companies to acquire its business.
2) Hostile acquisition- In this the company does not want to sell its business. However the
other company takes aggressive route of buying its equity shares of the target company
from its existing shareholder.
Methods of Acquisition:
An acquisition may be affected by
(a) agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting
power;
(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means
of cash, issuance of loan capital, or insurance of share capital.
7
Takeover:
A ‘takeover’ is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of share exchange or cash price and
the fulfillment of goals of combination all are different in takeovers than in mergers. For
example, process of takeover is unilateral and the offeror company decides about the
maximum price. Time taken in completion of transaction is less in takeover than in mergers,
top management of the offered company being more co-operative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a
movement in the company.
M&A Activities in India:
M&A Activities in India:

In 2007, there were a total of 676 M&A deals and 405 private equity deals, in 2007, the total
value of M&A and PE deals was USD 70 billion, Total M&A deal value was close to USD
51 billion, Private equity deals value increased to USD 19 billion Growth Drivers:
• Globalization and increased competition
• Concentration of companies to achieve economies of scale
• Cash Reserves with corporate Trends:
• Cross-border deals are growing faster than domestic deals
• Private Equity (PE) houses have funded projects as well as made a few acquisitions in India
Major M&A Deals Undertaken Abroad by India Inc.
1) Tata steel buys Corus Plc : 12.1$ billion
8
2) Hindalco acquired novelis: 6$ billion

3) Tata buy jaguar and land rover: 2.3$ billion
4) Essar steel buys Algoma Steel: 1.58$ billion
Vodafone buys hutch: 11$ billion
POSCO to invest in building steel manufacturing plants and facilities in India by 2016
Goldman Sachs Plans investment in private equity, real estate, and private wealth
management
In year 2008..
• M&A deals in India in 2008 totaled worth USD 19.8 bn
• Less compared to last year which stood at 33.1 bn $.
• Decline of M&A activity was in line with the global activity.
● Cross border M&A totaled 8.2 ban $ compared to 18.7 ban $
9
Acquire Target Country Deal Industry

r Compan targeted value
y ($ ml)
Tata Steel Corus Group UK 12000 Steel

plc
Hidalgo Novelist canada 5982 steel
Daewoo Korea 729

electronics
Videocon electronics
corp.
Beta harm Germany 597 Pharmaceutical

Dr.
Reddy’s
Labs
Suzlon Hansen Belgium 565 Energy

Energy Group
10
HPCL Kenya 500

petroleum
Kenya Oil &gas
refinery Ltd
Ranbaxy Terapia SA Romania 324 Pharmaceutical

labs
Tata Steel NatSteel Singapore 293 steel
Videocon Thomson SA France 290 electronics
Business valuation
This is a process and a set of procedures used to estimate the economic value of an
owner's interest in a business. Valuation is used by financial market participants to
determine the price they are willing to pay or receive to consummate a sale of a business.
In addition to estimating the selling price of a business, the same valuation tools are often
used by business appraisers to resolve disputes related to estate and gift taxation, divorce
litigation, allocate business purchase price among business assets, establish a formula for
estimating the value of partners' ownership interest for buy-sell agreements, and many
other business and legal purposes.
Elements of business valuation
Economic conditions
A business valuation report begins with a description of national, regional and local
economic conditions existing as of the valuation date, as well as the conditions of the
industry in which the subject business operates. A common source of economic
information for the first section of the business valuation report is the Federal Reserve
11
Board's Beige Book, published eight times a year by the Federal Reserve Bank. State
governments and industry associations often publish useful statistics describing
regional and industry condition
Financial Analysis
The financial statement analysis generally involves:
common size analysis,
- ratio analysis (liquidity, turnover, profitability, etc.),
- trend analysis
- industry comparative analysis.
This permits the valuation analyst to compare the subject company to other businesses in the
same or similar industry, and to discover trends affecting the company and/or the industry
over time. By comparing a company's financial statements in different time periods, the
valuation expert can view growth or decline in revenues or expenses, changes in
capital structure, or other financial trends. How the subject company compares to the
industry will help with the risk assessment and ultimately help determine the discount rate and
the selection of market multiples.
Normalization of financial statements
The most common normalization adjustments fall into the following four categories:
- Comparability adjustments.
The valuator may adjust the subject company's financial statements to facilitate a
comparison between the subject company and other businesses in the same industry
or geographic location. These adjustments are intended to eliminate differences
between the way that published industry data is presented and the way that the subject
company's data is presented in its financial statements.
- Non-operating adjustments.
It is reasonable to assume that if a business were sold in a hypothetical sales

transaction (which is the underlying premise of the fair market value standard), the
12
seller would retain any assets which were not related to the production of earnings or
price those non-operating assets separately. For this reason, non-operating assets are
usually eliminated from the balance sheet.
- Non-recurring adjustments.
The subject company's financial statements may be affected by events that are not
expected to recur, such as the purchase or sale of assets, a lawsuit, or an unusually
large revenue or expense. These non-recurring items are adjusted so that the financial
statements will better reflect the management's expectations of future performance.
- Discretionary adjustments.
The owners of private companies may be paid at variance from the market level of
compensation that similar executives in the industry might command. In order to
determine fair market value, the owner's compensation, benefits, perquisites and
distributions must be adjusted to industry standards. Similarly, the rent paid by the
subject business for the use of property owned by the company's owners individually
may be scrutinized.
Mergers and acquisitions
Reasons for M&A

1) Size is a great advantage in relation to costs. It assists, therefore, in enhancing
profitability, through cost reduction resulting from economies of scale, operating efficiency and
synergy. These savings could be in various areas e.g. finance, administration, capital
expenditure, production and warehousing.
2) A company with good profit record and strong position in its existing line of
business, may wish to reduce risks. Through business combination the risks is diversified,
particularly when it acquires businesses whose income streams are not correlated.
3) It helps to limit the severity of competition by increasing the company's market

power where a company takes over the business of its competitor. Thus, the company,
conscious of its monopolistic position, may, for instance, raise prices to earn more profit. In a
number of countries, a company is allowed to carry forward its accumulated loss to set-off
13
against its future earnings for calculating its tax liability. A loss-making or sick company
may not be in a position to earn sufficient profits in future to take advantage of the
carry forward provision. If it combines with a profitable company, the combined company
can utilize the carry forward loss and saves taxes
4) There are many ways in which business combination can result into financial
synergy and benefits. This helps in eliminating the financial constraint, deploying
surplus cash, enhancing debt capacity and lowering the financial costs.
5) Growth is essential for sustaining the viability, dynamism and value-enhancing
capability of a company. A company can achieve its growth objectives by
expanding its existing markets or by entering in new markets. For instance, if the
company cannot grow internally due to lack of physical and managerial resources,
it can grow externally by combining its operations with other companies through
mergers and acquisitions.
6) A business with good potential may be poorly managed and the assets
underutilized, thus resulting in a low return being achieved. Such a business is
likely to attract a takeover bid from a more successful company, which hopes to
earn higher returns.
Aim of mergers and acquisitions
One plus one makes three: this equation is the special alchemy of a merger or an
acquisition. The key principle behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two companies together are more
valuable than two separate companies - at least, that's the reasoning behind M&A.
Strong companies will act to buy other companies to create a more competitive, cost-
efficient company. The companies will come together hoping to gain a greater market
share or to achieve greater efficiency. Because of these potential benefits, target
companies will often agree to be purchased when they know they cannot survive alone.
Except the obvious synergy effect, the other important motives for M&A are:
operating synergy
financial synergy
diversification
14
economic motives
horizontal integration
vertical integration
tax motives
Advantages of M&A
Mergers and takeovers are permanent form of combinations which vest in
management complete control and provide centralized administration which are not
available in combinations of holding company and its partly owned subsidiary.
Shareholders in the selling company gain from the merger and takeovers as the premium offered
to induce acceptance of the merger or takeover offers much more price than the book value of
shares. Shareholders in the buying company gain in the long run with the growth of the company
not only due to synergy but also due to “boots trapping earnings”.
Mergers and acquisitions are caused with the support of shareholders, manager’s
ad promoters of the combing companies. The factors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars globally.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in value.
The sale of shares from one company’s shareholders to another and holding investment in shares
should give rise to greater values i.e. The opportunity gains in alternative investments.
Shareholders may gain from merger in different ways viz. From the gains and achievements of
the company i.e. Through
(a) Realization of monopoly profits;
(b) Economies of scales;
(c) Diversification of product line;
(d) Acquisition of human assets and other resources not available otherwise;
(e) Better investment opportunity in combinations.
15
One or more features would generally be available in each merger where

shareholders may have attraction and favour merger.
(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the
company effectively for all round gains and growth of the company which will provide them
better deals in raising their status, perks and fringe benefits. Mergers where all these things are
the guaranteed outcome get support from the managers. At the same time, where managers have
fear of displacement at the hands of new management in amalgamated company and also
resultant depreciation from the merger then support from them becomes difficult.
(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of their company
and the financial structure and strength. They can convert a closely held and private limited
company into a public company without contributing much wealth and without losing control.
(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in the
companies under merger plan.
(a) Consumers
The economic gains realized from mergers are passed on to consumers in the form
of lower prices and better quality of the product which directly raise their standard of living and
quality of life. The balance of benefits in favour of consumers will depend upon the fact whether
or not the mergers increase or decrease competitive economic and productive activity which
16
directly affects the degree of welfare of the consumers through changes in price level, quality of
products, after sales service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or other acquiring
company may have the effect on both the sides of increasing the welfare in the form of
purchasing power and other miseries of life. Two sides of the impact as discussed by the
researchers and academicians are: firstly, mergers with cash payment to shareholders provide
opportunities for them to invest this money in other companies which will generate further
employment and growth to uplift of the economy in general. Secondly, any restrictions placed
on such mergers will decrease the growth and investment activity with corresponding decrease in
employment. Both workers and communities will suffer on lessening job Opportunities,
preventing the distribution of benefits resulting from diversification
of production activity.
(c) General public

Mergers result into centralized concentration of power. Economic power is to be understood as
the ability to control prices and industries output as monopolists. Such monopolists affect social
and political environment to tilt everything in their favour to maintain their power ad expand
their business empire. These advances result into economic exploitation. But in a free economy
a monopolist does not stay for a longer period as other companies enter into the field to reap the
benefits of higher prices set in by the monopolist. This enforces competition in the market as
consumers are free to substitute the alternative products. Therefore, it is difficult to
generalize that mergers affect the welfare of general public adversely or favorably. Every merger
of two or more companies has to be viewed from different angles in the business practices which
protects the interest of the shareholders in the merging company and also serves the national
purpose to add to the welfare of the employees, consumers and does not create hindrance in
administration of the
Government polices.
17
Procedure of M&A
Draft Scheme of Arrangement ( Amalgamation / Merger). Scheme of amalgamation should be
prepared by the companies which have agreed to merge. There is no prescribed form of the
scheme but scheme should generally contain:
1
1) Particulars about transferee and transferor companies ;

2) Appointed date i.e. Cut-Off date from which the transferor company rest with transferee
company ;
3) Main terms of transfer of assets from transferor to transferee with power to execute on behalf
or for transferee the deed or documents being given to transferee ;
4) Main terms of transfer liabilities from transferor to transferee covering any conditions
attached to loans/ debentures/ bonds/ other liabilities from bank/ financial institution/ trustees
and listing conditions attached thereto ;
5) Effective date when the scheme will come into effect ;
6) Conditions as to carrying on the business activities by transferor between ‘appointed date’
and ‘effective date’ ;
7) Description of happenings and consequences of the scheme coming into effect on effective
date;
8) Share capital of transferor company specifying authorized capital, issued capital and
subscribed and paid-up capital ;
9) Share capital of transferee company covering above heads ;
10) Description of proposed share exchange ratio, any conditions attached thereto, any
fractional share certificates to be issued, transferee company’s responsibility to obtain consent
of concerned authorities for issue and allotment of shares and listing
18
11)Surrender of shares by share-holder of transferor company for exchange into new share
certificates ;
12) Conditions about payment of dividend, ranking of equity shares pro-rata dividend declaration
and distribution ;
13) Status of employees of the transferor companies from effective date and the status of the
provident fund, gratuity fund, super annuity fund or any special scheme or funds created or
existing for the benefit of the employees;
14)Treatment on effective date of any debit balance of transferor company balance sheet ;
15) Miscellaneous provisions covering income-tax dues, contingencies and other accounting
entries deserving attention or treatment ;
16) Commitment of transferor and transferee companies towards making
applications/ petitions U/s-391 and 394 and other applicable provisions of the
Companies Act, 1956 to their respective High Courts ;
17) Enhancement of borrowing limits of the transferee company upon the
scheme coming into effect ;
18) Transferor and transferee companies give assent to change in the
scheme by the court or other authorities under the law and exercising the
powers on behalf of the companies by their respective Boards ;
19) Description of powers of delegatee of transferee to give effect to the
scheme;
20) Qualification attached to the scheme, which require approval of different
agencies, etc ;
21) Description of revocation/ cancellation of the scheme in the absence of
approvals qualified in Clause-XX above not granted by concerned authorities;
22) Statement to bear costs etc, in connection with the scheme by the
transferee company ;
Consider it in Board Meeting.

Respective BoD of transferor and transferee company should approve of the scheme. The Board
of Directors should in fact approve the scheme only after it has been cleared by the financial
institutions/ banks, which have granted loans to these companies or the debenture trustees to
19
avoid any major change in the meeting of creditors to be convened at the instance of the
Company Court’s U/s-391 of the Companies Act, 1956. Approval of Reserve Bank of India is
also needed where the scheme of amalgamation contemplates issue of share/ payment of
cash to non-resident Indians or foreign national under the provisions of Foreign Exchange
Management
(Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000. In particular, regulation 7 of the above regulations provide for
compliance of certain conditions in the case of scheme of merger or amalgamation as approved
by the court.
Apply to Court for direction to call General Meeting.

The next step is to make an application U/s-39(1) to the High Court having jurisdiction over the
Registered Office of the Company. The transferor and the transferee company should make
separate applications to the High Court. The application shall be made by a Judge’s Summons
in Form No-33 supported by an affidavit in Form No-34 (See Rule-82 of the Companies
(Court) Rules, 1959). The following documents should be submitted with the
Judge’s Summons
a) A true copy of the Company’s Memorandum and Articles
b) A true copy of the Company’s latest audited balance sheet
c) A copy of the Board Resolution, which authorizes the Director to make the application
to the High Court.
High Court Directions for Members ‘Meeting:

Upon the hearing of the summons, the High Court shall give directions fixing the date, time and
venue and quorum for the members’ meeting and appoint an Advocate Chairman to preside over
the meeting and submit a report to the Court. Similar directions are issued by the court for calling
the meeting of creditors in case such a request has been made in the application.
20
Approval of Registrar of High Court to Notice for Calling the

Meeting of Members/ Creditors:
Pursuant to the directions of the Court, the transferor as well as the transferee companies
shall submit for approval to the Registrar of the respective High Courts the draft notices
calling the meetings of the members in Form No-36 together with the scheme of arrangements
and explanations, statement U/s-393 of the Companies Act and Form of Proxy in Form No-37 of
the Companies (Court) Rules to be sent to members along with the said notice. Once
Registrar has accorded approval to the notice, it should be got signed by the Chairman appointed
for meeting by the High Court who shall preside over the proposed meeting of members.
Send notices of General Meeting to Members/ shareholders with

Scheme.
Once the notice has been signed by the Chairman of the forthcoming meeting as
aforesaid it could be dispatched to the members under Certificate of posting at least 21 days
before the date of meeting (Rule 73 of Companies (Court) Rules, 1959).
Notice can be by way of Advertisement also

The court may direct the issuance of notice of the meeting of these shareholders by
advertisement. In such case Rule-74 of the Companies (Court) Rules provides that the notice
of the meeting should be advertised in; such newspaper and in such manner as the Court might
direct not less than 21 clear days before the date fixed for the meeting. The advertisement shall
be in Form No-38 appended to the Companies (Court) Rules. The companies should submit
the draft for the notice to be published in Form No38 in an English daily together with a
translation thereof in the regional language to the Registrar of High Court for his approval. The
advertisement
should be released in the newspapers after the Registrar approves the draft.
Holding the Shareholders’ General Meeting and Passing the

Resolutions:
21
The general meeting should be held on the appointed date. Rule-77 of the Companies (Court)
Rules prescribes that the decisions of the meeting held pursuant to the court order should be
ascertained only by taking a poll. The amalgamation scheme should be approved by the
members, by a majority in number of members present in person or on proxy and voting
on the resolution and this majority must represent at least ¾ the in value of the shares held by
the members who vote in the poll.
Filing of Resolutions of General Meeting with Registrar of

Companies :
Once the shareholders general meeting approves the amalgamation scheme by a majority in
number of members holding not less than ¾ in value of the equity shares, the scheme is binding
on all the members of the company. A copy of the resolution passed by the shareholders
approving the scheme of amalgamation should be filed with the Registrar of Companies in Form
No-23 appended to the Companies (Central Government’s) General Rules and Forms, 1956
within 30 days from the date of passing the resolution.
Report the result of the meeting to Court:

The chairman of the general meeting of the shareholders is required to submit to the court
within seven days from the date of the meeting a report in Form No-39, Companies (Court)
Rules, 1959 setting out therein the number of persons who attend either personally or by
proxy, and the percentage of shareholders who voted in favour of the scheme as well as the
resolution passed by the meeting.
Move Court for approval of the scheme by filing petition in 7 days in

Form 40:
Within seven days from the date on which the Chairman has submitted his report about the
result of the meeting to the Court, both the companies should make a joint petition to the High
Court for approving the scheme of amalgamation. This petition is to be made in Form No-40
of Companies (Court) Rules. The court will fix a date of hearing of the petition. The notice of
22
the hearing should be advertised in the same papers in which the notice of the meeting was
advertised or in such other newspapers as the court may direct, not less than 10 days before the
date fixed for the hearing (Rule-80 of Companies (Court) Rules).
Issue of Notice to Regional Director, Company Law Board U/s-394-A
On receipt of the petition for amalgamation U/s-391 of Companies Act, 1956 the Court will give
notice of the petition to the Regional Director, Company Law Board and will take into
consideration the representations, if any, made by him.
Hearing of Petition & Confirmation of Scheme

Having taken up the petition by the court for hearing it will hear the objections first and
if there is no objection to the amalgamation scheme from Regional Director or from any other
person who is entitled to oppose the scheme, the court may pass an order approving the
scheme of amalgamation in; Form No-41 or Form No-42 of Companies (Court) Rules. The
court may also pass order directing that all the property, rights and powers of the transferor
company specified in the schedules annexed to the order be transferred without further act or
deed to the transferee company and that all the liabilities and duties of the transferor company be
transferred without further act or deed.
Filing of Court Order with ROC by both the Companies:

Both the transferor and transferee companies should obtain the Court’s order sanctioning the
scheme of amalgamation and file the same with ROC with their respective jurisdiction as
required vide Sec-394(3) of the Companies Act, 1956 within 30 days after the date of the
Court’s Order in Form No-21 prescribed under the (Central Government’s) General Rules
and Forms, 1956. The amalgamation will be given effect to from the date on which the High
Court’s Order is filed with the Registrar.
Transfer of the Assets & Liabilities

Section-394(2) vests power in the High Court to order for the transfer of any property or
liabilities from transferor company to transferee company. In pursuance of and by virtue of
such order such properties and liabilities of the transferor shall automatically stand transferred
23
to transferee company without any further act or deed from the date the Court’s Order is filed
with ROC.
Allotment of Shares to Shareholders of Transferor Company
Pursuant to the sanctioned scheme of amalgamation, the share-holders of
the transferor company are entitled to get shares in the transferee company in the exchange
ratio provided under the said scheme. There are three different situations in which allotment
could be given effect :
i) Where transferor company is not a listed company, the formalities prescribed under
listing agreement do not exist and the allotment could take place without setting the record
date or giving any advance notice to shareholders except asking them to surrender their old
share certificates for exchange by the new ones ;
ii) The second situation will emerge different where transferor company is a listed company. In
this case, the stock exchange is to be intimated of the record date by giving at least 42 days
notice or such notice as provided in the listing agreement ;
iii) The third situation is where allotment to Non-Resident Indians is involved and permission of
Reserve Bank of India is necessary. The allotment will take place only on receipt of RBI
permission. In this connection refer to Regulations- 7, 9 & 10B of Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations,
2000 as and where applicable. Having made the allotment, the transferee company is required to
file with ROC with return of allotment in Form No-2 appended to the Companies (Central
Government’s) General Rules and Forms within 30 days from the date of allotment in terms of
Sec-75 of the Act. Transferee company shall having issued the new share certificates in lieu of
and in exchange of old ones, surrendered by transferor’s shareholders should make
necessary entries in the register of members and index of members for the shares so allotted in
terms of Sec-150 and 151 respectively of the Companies Act, 1956.
Listing of the Shares at Stock Exchange
After the amalgamation is effected, the company which takes over the assets and liabilities
of the transferor company should apply to the stock exchanges where its securities are listed, for
listing the new shares allotted to the shareholders of the transferor company.
Court order to be annexed to Memorandum of Transferee Company
24
It is the mandatory requirement vide Sec-391(4) of the Companies Act, 1956that after the
certified copy of the Court’s Order sanctioning the scheme of amalgamation is filed with
Registrar, it should be annexed to every copy of the Memorandum issued by the transferee
company. Failure to comply with requirement renders the company and its officers liable to
punishment.
Preservation of Books & Papers of Amalgamated Company

Sec-396A of the Act requires that the books and papers of the amalgamated
company should be preserved and not be disposed of without prior permission of the
Central Government.
The Provisions under the Companies Act, 1956 (Sec. 391-394) Section 391 – 394 of the
Companies Act, 1956 deals with Compromises, Arrangements and Reconstructions and
other related issues through schemes of arrangement approved by the High Courts. A
resolution to approve the scheme of arrangement has to be passed by the shareholders in the
general meetings. The shareholders have to vote on the resolutions on the schemes of
arrangement on the basis of the disclosures in the notice/explanatory statement. Section
393 of the Companies Act, 1956 specifies the broad parameters of the disclosures which
should be given to the shareholders / creditors, for approving a scheme of arrangement.
Section 391
Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company
Law Tribunal to review and to allow any compromise or arrangement, which is proposed
between a company and its creditors or any class of them or between a company and its members
or any class of them.
However, because of non formation of National Company Law Tribunal, these powers still lie
with High Courts and the parties concerned can make applications to High Courts. If the
Creditors, Members present at a General meeting representing three fourth of total number agree
to any compromise or arrangement, it becomes binding on the rest of the members or
creditors provided the tribunal sanctions the compromise or arrangement.
The order made by Tribunal will come in to effect only after the filing of certified copy with
the Registrar of Companies.
25
Court’s power under the section are very wide and has discretion to allow any sort of
arrangement between the company and members.
Scope and ambit of the Jurisdiction of the Court:
1)The sanctioning court has to see to it that all the requisite statutory procedure for supporting
any scheme has been complied with along with requisite meetings.
2) That the scheme put up for sanction of the court is backed up by the requisite majority vote.
3) That the concerned meetings of the creditors or members or any class of them had the relevant
material to enable the voters to arrive at an informed decision for approving the scheme.
4) That the proposed scheme is not found to be violative of any provision of law and is not
contrary to public policy.
Section 392
1) Under this section, the court has power to supervise the carrying out of the compromise
or an arrangement; and
2) may, at the time of making such order or at any time thereafter, give such directions in
regard to any matter or make such modifications in the compromise or arrangement as it
may consider necessary for the proper working of the arrangement.
3) If the court is of the view that a compromise /arrangement sanctioned under section 391
cannot be worked satisfactorily with or without modifications, it may on it own
motion or on the basis of an application made by an interested party may order winding
up of the company under section 433 of the Act.
Section 393
1) This section prescribes the procedure required for convening the meeting of the
members or creditors called under section 391.
2) The notice for the meeting should be sent along with a statement setting forth the
terms of the compromise and or arrangement and explaining its effect and in
26
particular, the statement must state all material interest of the directors, managing
directors of the company, whether in their capacity as such or as members or creditors
of the company or otherwise.
3) Where the compromise or arrangement affects the rights of debenture holders of the
company, the statement shall give the information and explanation in respects to the
trustees of any deed for securing the issue of the debentures as it is required to give
in respect of directors.
4) Any default in complying with the requirements under this section may lead to a fine
of Rs. 50, 000 against the concerned official of the company, who is found guilty.
Section 394
Where the court is of the view that the proposed arrangement/scheme is of such nature that
1) the scheme is for the reconstruction of any company or for amalgamation of any
two or more companies; and
2) that under the scheme the whole or any part of the undertaking property or liabilities
of any concerned company is to be transferred to another company;
the court may make provision for all or any of the following matters.
1) The transfer to Transferee Company of the property or liabilities of transferor
company.
2) The allotment or appropriation by the transferee company of any shares,
debentures or other like interest in that company which, under the arrangement, are to be
allotted or appropriated by that company to.
3)The continuation of any legal proceeding against the transferee company by the
transferor company.
4) The dissolution, without winding up, of any transferor company.
5) The provisions for any dissenting persons. Who are opposing such scheme or any other
matter, which the court deems fit.
27
Business valuation in mergers and acquisitions
The increasing wave in business amalgamations started in the year 2000. Most of the
recent mergers and acquisitions are in such areas like:
the oil and gas,
textile,
insurance,
banking
conglomerates sectors of the economy
It is trite knowledge today that the world economy continues to be shaped by the forces of
globalization, deregulation, and advancement in technology. All these forces combined
tend to break barriers of trade and control and thus, expose the economy to change and
competition. Mergers and acquisitions may help to reduce this completion. Then the
property must be valued so the conditions of the transfer of the property can be
determined.
An example here is an Nigerian case where, The Insurance Act, 2003 increased the
minimum paid-up share capital of insurance companies to carry life, general and
composite insurance businesses as well as reinsurance business for about 0,4%. Out of the
117 insurance companies 103 were able to meet the minimum capital requirements. All of
the 4 reinsurance companies were about to recapitalize. But about 14 insurance companies
were unable to meet the capital requirements and they opted for mergers to prevent their
28
operating licenses from being cancelled.

With the present economic situation, some companies are now experiencing serious cash
flow problems, and these have made it difficult for them to meet debt obligations to their
bankers. Consequently, an increasing number of companies are now faced with
receivership and foreclosure threats from their bankers.
Another influence potentially affecting valuations in business combination is the changing
structure of corporate land holdings. The increasing realization that property is an asset to
be pro-actively managed has implications for both tenure and valuation. This action
requires the periodic revaluations to be carried out on the basis of investment holding.
The interest in privatization of publicly held businesses raised issues of pricing of real
estate assets that were sold or leased out or acquired or combined with other business
entities as part of the privatization.
Business combination is said to add value to the new company more than the physical and
financial asset previously owned by the separate entities. To evaluate the benefits, it is
important to examine the rationale for the deal, the possible sources of added value and
the way that value is assessed and apportioned amongst parties to the deal.
All these factors lead to a strategic importance of valuations in business investment
decisions, especially, in merger, acquisition and takeover of companies. A successful
merger and acquisition will require the input from various professionals, such as
accountants, stockbrokers, estate surveyors and valuers, lawyers and bankers, etc. These
professionals, may be required to advice on issues such as:
business valuations,
valuation of assets,
acquisitions strategies,
statutory regulations,
business investigations,
taxation
post-acquisition advice
Some of these professionals could also assist in the negotiation process.
29
Steps in valuation
Analyzing Historical Performance
Forecast Performance
1) Evaluate the company's strategic position, company's competitive advantages
and disadvantages in the industry. This will help to understand the growth
potential and ability to earn returns over WACC.
2) Develop performance scenarios for the company and the industry and critical
events that are likely to impact the performance.
3) Forecast income statement and balance sheet line items based on the scenarios.
4) Check the forecast for reasonableness.
5) Estimating The Cost Of Capital
The Cost Of Equity Financing

1) CAPM
2) The Arbitrage Pricing Model (APM)
3) Estimating The Continuing Value
Valuation techniques
Earning based valuation Market based valuation Asset based valuation
1) Discounted cash
flow/free cash flow 1) Market capitalization 1) Net adjusted asset
2) Cost to create for listed companies value or economic
approach 2) Market multiples of book value
3) Capitalized earnings comparables 2) Intangible asset value
method
companies for unlisted 3) Liquidation value
companies
30
Calculating and Interpreting Results

1) Calculating And Testing The Results
2) Interpreting The Results Within The Decision Context
Valuation methodologies, issues and problems

Property (including land and real estate assets) is an essential element of many businesses.
It is often used as collateral for borrowing by the owners and is one of the key „factors of
production" in most businesses. The value of holding property to the business needs to be
measured against the return that the equity could achieve both within the business and
elsewhere. Usually, in business decisions including mergers and acquisitions, investors
will usually want to review financial statements: balance sheet, profit and loss account, auditors'
and directors' reports - for the current status and a report on recent history business plan.
The balance sheet, which in most countries, reflect assets on historical cost concept, is a
yearly snapshot of the assets and liabilities of the firm. People turn to the balance sheet for
an impression of the firm's general nature, size, and ownership structure: they look to it
also for help with more detailed problems of asset strength, liquidity, etc.
The valuation of the assets and liabilities is difficult for many reasons The net asset
position shown on the balance sheet is often based on historical costs and, therefore,
does not take into account subsequent changes in the value and condition of the assets.
Resources which once had value, particularly productive assets, might now be valueless
because they embody automated technologies.
There is also the problem that some items may be missing from the balance sheet, such as land,
certain intangibles, and various liabilities such as pension benefits, post-retirement
health-care costs, and contingencies for environmental damage because they were not
required to be recorded according to the accounting principles used in the country. Proponents
of value-based accounting models challenge the informational value of the historical cost
model and suggest that after acquisition, accounting measurement should continue to
express market values. Market value can be expressed either as replacement. cost" or „fair
value", that is, what the sales price for the asset would be.
31
Fair Value
Fair value of land and real estate assets is the amount for which they could be
exchanged between knowledgeable, willing parties in arm's length transaction
(International Accounting Standards Board (IASB)). Investment property in
companies involved in merger and acquisition is measured at fair value. Gains or
losses arising from changes in the fair value of such property are included in net profit
or loss for the period in which they arises. In relation to owner-occupied property, it
can encompass market value or its surrogate (in the absence of an identified market),
depreciated replacement cost (DRC). Fair value is synonymous with the definition of
market value given by the International Valuation Standards Committee (FVSC).
According to IASB the market value is "the estimated amount for which an asset
should exchange on the date of valuation between a willing buyer and a willing seller
in arm's length transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion".
It is stated that the best evidence of fair value is normally given by current prices on an active
market for similar property in the same location and condition and subject to similar lease
and other contracts. The acquiring and consolidating companies have to take fair value into
consideration in their respective negotiation or bargaining positions. Nonetheless, the
unique and localized nature of property market including absence of reliable and centralized
data bank resulting in wide variation or accuracy in value estimates may mar the adoption of this
concept of business value. The inclusion of capital gains or losses (which is inherent in
valuations undertaken by valuers) arising from changes in the fair values in the net profit or
loss of the period will have wide ranging effects on the net income or loss of the
companies in business combinations. For example, solidity, which is the equity/assets
ratio, will increase as the fair value of the investment properties increases, if the fair value
model is applied.
Again, total equity, (shareholder's equity) which is the sum of restricted equity and the retained
earnings will increase tremendously as value changes will be included in the profit. And,
volatility in the net income will increase if the fair value model is applied. Fair value is an
imprecise term designed to give flexibility to accountants and their corporate clients. This
may conflict with the needs of valuers who require specificity
32
in order to give consistent advice.
Replacement Cost
The depreciated replacement cost (DRC) of the buildings and plant including other
assets in business combinations would take into account the cost of modern substitutes
using modern materials and technology and having the same service capacity - that is,
the same output. As earlier reiterated, it is the surrogate figure, not a market - based
valuation, used in the absence of a provable value. The advocate of this approach
observe that given the continuity of the entity, even in consolidation, absorption or
acquisition, the selection of appropriate measure of value for non-monetary assets
would have to be based on the distinction between what is essential to the continuance
and non-continuance of operations. If any asset or component of an asset is essential to
the continuance of operations, it is worth to the entity no more than it would cost to
replace the operating capability, which it provides. If it is not essential to operations, it
is worth no more than its net realizable value (NRV), equivalent of market value.
This method is based on land value plus modern equivalent replacement cost of the
building or plant asset, suitably discounted for age and obsolescence. More often than
not the value arrived at here may be either of „value to the business" or „value in use".
The International Accounting Standards Board (IASB) definitions for this terms are:
1) value to the business - is the recoverable amount is the higher of value in use and
net realizable value. Value in use is essentially the „worth" of the property to the
business. Net realizable value is, in effect, the same as market value, which would
be the equivalent of the contract price in the sale document, but less costs of
disposal.
2) “value-in-use” is entity-specific and, a non-market assessment; it is the present
value of estimated cash flows expected to arise from the continuing use of an asset
and from its disposal at the end of its useful life.
The IVSC, however, defines the term as “an apportionment of business value of an
overall enterprise as allocated between individual assets contributing to that
enterprise”.
33
It is important here to distinguish Existing Use Value (EUV) from the above definitions. EUV is
a market-based assessment and assumes a hypothetical occupier, not the actual occupier.
Therefore, any special reason for occupation, over and above that which would be recognized in
the marketplace, must be disregarded.
The replacement cost method to arrive at EUV of assets of an enterprise is highly favored by
valuers in the country. It also meets with the requirement of inflation accounting rather than the
use of historical cost concept. Usually, in practice, DRC is a ceiling amount and subject to a test
of adequate profitability, both potential and current, as compared with the total capital employed.
Unfortunately for those businesses involved mergers and acquisitions in the public sector there is
no test of adequate profitability against which to benchmark the DRC.
The assets in these businesses are used for non-profit making social benefit objective. In most
cases, it is up to the directors, who may „write down” the valuer's figure, to make this judgment.
At this point, the DRC valuation moves away from being a surrogate for a market-based
assessment and toward a value in use concept, which may be problematic. Besides, the
determination of allowance for depreciation and obsolescence is often based on fairly subjective
criteria. It is often difficult to separate how the owner uses and occupies the property from how a
hypothetical owner might use it. Also, the argument against the adoption of DRC in the valuation
of assets of an on-going entity is that given the assumption of enterprise continuity it does not
follow that particular operations of the enterprise are also viable.
The continuity of a specific operation is a function of economic factors and is a decision choice
in a decision context, which subsumes the present value consideration. And, in respect of a
specific operation, the relevant factors to be considered in assessing the viability of that
operation, are the services generated by assets, not the assets themselves. This may be true of,
especially, assets surplus to company requirement, redundant or investment properties, and, are
usually valued on alternative use basis adopting fair value concept.
Either of the fair value or the replacement cost may not work out well for the valuation
of goodwill, patents and trademarks.
34
Accounting/Financial Ratios
The key ratios in financial accounting may be helpful in analyzing the value of
business entity in merger and acquisition. This will assist to condense huge amount of
data in financial statements into a manageable form in order to measure the company's
performance.
1) Profitability Ratios used in analyzing the profitability or return that an enterprise earns on
its investments. For example, trading profit as a percentage of turnover, dividend per
share, payout ratio which is dividends/earnings, profit before interest and tax as a
percentage of average capital employed and, assets per share to assess the asset backing
of shares based on the value of the net assets divided by the number of shares.
2) Market Value Ratios, which indicate how highly the firm is valued by investors. This
consists of the following:
a) Price-earnings ratio (PE) equal Stock Price over Earnings Per Share.
b) Dividend yield is given by Dividend Per Share divided by Stock Price.
c) Market to book ratio is expressed as Stock Price over Book Value Per Share
3) Leverage ratio is also used to determine how heavily a company is in debt. And, it is
done through debt ratios and times interest earned,
a) Efficiency ratio measures how productively a company is using its assets by comparing
sales (revenue) to assets value.
b) Liquidity ratio assesses how easily a company can lay its hand on cash by examining the
current ratio (assets).
Discounted Cash Flow (DCF)

In a merger or acquisition, the acquiring firm is buying the business of the target firm, rather than
a specific asset. Thus, merger is a special type of capital budgeting technique. What is the value
of the target firm to the acquiring firm after merger? This value should include the effect of
operating efficiencies and synergy. The acquiring firm should appraise merger as a capital
budgeting decision, following the DCF approach. The acquiring firm incurs a cost (in buying the
business of the target firm) in the expectation of a stream of benefits (in the form of cash flows)
in future. The cash flows can be determined through profit stream of the affected concern. Thus,
35
merger will be advantageous to the acquiring company if the present value, that is, the fair value,
is greater than the cost of acquisition.
The adoption of profit method in determining the cash inflows is regarded as being
specialist, with most valuers receiving only nominal training in the method during
their formal training.
In other words, the discounted-cash-flow approach in an M&A setting attempts to
determine the value of the company (or “enterprise value”) by computing the present
value of cash flows over the life of the company. Since a corporation is assumed to
have infinite life, the analysis is broken into two parts:
A) a forecast period
B) a terminal value
A) In the forecast period, explicit forecasts of free cash flow must be developed
that incorporate the economic costs and benefits of the transaction. Ideally, the
forecast period should equate with the interval over which the firm enjoys a
competitive advantage (i.e., the circumstances where expected returns exceed
required returns). In most circumstances, a forecast period of five or ten years
is used.
The value of the company derived from free cash flows occurring after the
forecast period is captured by a terminal value. Terminal value is estimated in
the last year of the forecast period and capitalizes the present value of all future
cash flows beyond the forecast period. To estimate the terminal value, cash
flows are projected under a steady state assumption that the firm enjoys no
opportunities for abnormal growth or that expected returns equal required
returns following the forecast period. Once a schedule of free cash flows is
developed for the enterprise, the Weighted Average Cost of Capital (WACC)
is used to discount them to determine the present value. The sum of the present
values of the forecast period and the terminal value cash flows provides an
estimate of company or enterprise value.
It is important to realize that these fundamental concepts work equally well
36
when valuing an investment project as they do in an M&A setting.
The free cash flows in an M&A analysis should be the expected incremental
operating cash flows attributable to the acquisition, before consideration of
financing charges (i.e., prefinancing cash flows). Free cash flow equals the
sum of NOPAT (net operating profits after taxes.), plus depreciation and
noncash charges, less capital investment and less investment in working
capital. NOPAT is used to capture the earnings after taxes that are available to
all providers of capital: i.e., NOPAT has no deductions for financing costs.
Moreover, since the tax deductibility of interest payments is accounted for in
the WACC, such financing tax effects are also excluded from the free cash
flow, which can be expressed as:
FCF = NOPAT + Depreciation - CAPEX – ΔNWC
Where:
- NOPAT is equal to EBIT (1-t) where t is the appropriate marginal (not
average) cash tax rate, which should be inclusive of federal, state and local,
and foreign jurisdictional taxes. Depreciation is non-cash operating charges
including depreciation, depletion, and amortization recognized for tax
purposes.
- CAPEX is capital expenditures for fixed assets.
- ΔNWC is the increase in net working capital defined as current assets less
the non-interest bearing current liabilities.
The cash-flow forecast should be grounded in a thorough industry and

company forecast. Care should be taken to ensure that the forecast reflects
consistency with firm strategy as well as with macroeconomic and industry
trends and competitive pressure. The forecast period is normally the years
during which the analyst estimates free cash flows that are consistent with
creating value.
The net working capital should include the expected cash, receivables,
inventory, and payables levels required for the operation of the business. If the
37
firm currently has excess cash (more than is needed to sustain operations), for
example, the cash forecast should be reduced to the level of cash required for
operations. Excess cash should be valued separately by adding it to the
enterprise value.
In this context, value is created whenever earnings power increases

(NOPAT/Sales) or when asset efficiency is improved (Sales/Net Assets). Or,
stated differently, analysts are assuming value creation whenever they allow
the profit margin to improve on the income statement and whenever they allow
sales to improve relative to the level of assets on the balance sheet.
B) Terminal value
A terminal value in the final year of the forecast period is added to reflect the
present value of all cash flows occurring thereafter. Since it capitalizes all
future cash flows beyond the final year, the terminal value can be a large
component of the value of a company, and therefore deserves careful attention.
This can be of particular importance when cash flows over the forecast period
are close to zero (or even negative) as the result of aggressive investment for
growth.
A standard estimator of the terminal value (TV) in the final year of the cash
flow forecast is the constant growth valuation formula.
Terminal Value = FCFSteady State ÷ (WACC - g)

Where:
- FCFSteady State is the steady state expected free cash flow for the year
after the final year of the cash flow forecast
- WACC is the weighted average cost of capital
- g is the expected constant annual growth rate of FCFSteady State in
perpetuity
One challenging part of the analysis is to generate a free cash flow for the year
after the forecast period that reflects a sustainable or “steady state” cash flow.
In this context, we define net assets as total assets less non-interest bearing
38
current liabilities or equivalently as net working capital plus net fixed assets. A
similar relationship can be expressed using return on capital (ROC).
Since the uses of capital (working capital and fixed assets) equals sources ofcapital
(debt and equity), it follows that RONA (return on net assets) equals ROC (return on
capital) and therefore, ROC = NOPAT/(Debt + Equity).
Discount rate
The discount rate should reflect the weighed average of investors’ opportunit y cost
(WACC) on comparable investments. The WACC matches the business risk, expected
inflation, and currency of the cash flows to be discounted. In order to avoid penalizing
the investment opportunity, the WACC also must incorporate the appropriate target
weights of financing going forward. Recall that the appropriate rate is a blend of the
required rates of return on debt and equity, weighted by the proportion these capital
sources make up of the firm’s market value.
WACC = Wd kd (1-t) + We ke
where:
- k is the required yield on new debt: it’s yield to maturity
- kd is the cost of equity capital.
Wd, We are target percentages of debt and equity (using market values of debt and equity)
t is the marginal tax rate.
The costs of debt and equity should be going-forward market rates of return. For debt securities,
this is often the yield to maturity that would be demanded on new instruments of the same credit
rating and maturity. The cost of equity can be obtained from the Capital Asset Pricing Model
(CAPM):
ke = Rf + ß (Rm – Rf)
where:
- Rf is the expected return on risk-free securities over a time horizon consistent with
the investment horizon. Most firm valuations are best served by using a long
39
maturity government bond yield.

- Rm – Rf is the expected market risk premium. This value is commonly estimated as
the average historical difference between the returns on common stocks and longterm
government bonds.
ß is beta, a measure of the systematic risk of a firm’s common stock. The beta of
common stock includes compensation for business and financial risk.
Debt for purposes of the WACC should include all permanent, interest-bearing debt. If
the market value of debt is not available, the book value of debt is often assumed as a
reasonable proxy. This approximation is more accurate the shorter the maturity of the
debt and the closer the correspondence between the coupon rate and required return on
the debt.
The M&A Setting
On the very beginning of setting of M&A it should be recognized that there are two parties
(sometimes more) in the transaction: an acquirer (buyer or bidder) and a target firm (seller or
acquired). Suppose a bidder is considering the potential purchase of a target firm and we are
asked to assess whether the target would be a good investment.
Potential sources of value, skills, capabilities, critical technology

Potential sources of gain or cost savings achieved through the combination are called synergies.
Baseline cash-flow projections for the target firm may or may not include synergies or cost
savings gained from merging the operations of the target into those of the acquirer. If the
base-case cash flows do not include any of the economic benefits an acquirer might bring to a
target, they are referred to as stand-alone cash flows. Examining the value of a target on a
stand-alone basis can be valuable for several reasons.
First, it can provide a view of what the target firm is capable of achieving on its own. This may
help establish a floor with respect to value for negotiating purposes.
Second, construction of a stand-alone DCF valuation can be compared to the target’s current
market value. This can be useful in assessing whether the target is under or over valued in the
market place. However, given the general efficiency of markets, it is unlikely that a target will be
40
significantly over or undervalued relative to the market. Hence, a stand-alone DCF valuation
allows analysts to calibrate model assumptions to those of investors. By testing key assumptions
relative to this important benchmark, analysts can gain confidence that the model provides a
reasonable guide to investors’ perception of the situation.
Choosing the proper discount rate in case when one performs a stand-alone
analysis on target.
If the target is going to be run autonomously on a stand-alone basis, the most appropriate cost of
capital is the WACC of the target firm. In this instance, the business risk investors bear as a result
of this transaction is the risk of the target’s cash flows. The use of the target’s WACC also
assumes that the target firm is financed with the optimal proportions of debt and equity and that
these proportions will continue postmerger. One way to estimate the target’s WACC is to
compute the WACCs of firms in the target’s industry and average them (or rely on the median
WACC).
By using the betas and financial structures of firms engaged in this line of business, a reliable
estimate of the business risk and optimal financing can be established going forward. Less
frequently, an acquirer may intend to increase or decrease the debt level of the target
significantly after the merger - perhaps because it believes the target’s current financing mix is
not optimal. The WACC still must reflect the business risk of the target.
Incorporation the value of synergies in a DCF analysis
Operating synergies are reflected in enterprise value by altering the stand-alone cash flows to
incorporate the benefits and costs of the combination. Free cash flows that include the value an
acquirer and target can achieve through combination and are referred to as combined or merger
cash flows. If the acquirer plans to run the acquired company as a stand-alone entity, there may
be little difference between the stand-alone and merger cash flows. However, in many strategic
acquisitions, there can be sizeable differences. Moreover, how the value of these synergies is
split between the parties through the determination of the final bid price or premium paid is a
major issue for negotiation. If the bidder pays a premium equal to the value of the synergies, all
of the benefits will accrue to target shareholders, and the merger will be a zero net –present value
investment for the shareholders of the acquirer. The premium paid is usually measured as the
41
(bid price for each share-market price for target shares before the merger) market price for target
shares before the merger.
Selecting the appropriate discount rate to value the merger cash flows
While going through this point it is useful to consider two scenarios: one where the target and
acquirer are in the same industry and one where they are in different industries.
If the target and acquirer are in the same industry, then it is likely that they have similar business
risk. Since in principle the business risk is similar between the target and the acquirer, either’s
WACC may be justifiably used.
If the target and acquirer are in different industries, their business risks are not likely to be the
same (e.g., suppose a pharmaceutical company buys an airline). Because business risk is
different, their assets, collateral, and debt-paying abilities are also likely to differ. This suggests
that an acquirer, in order to realize the maximum value from the transaction, will be motivated to
finance the target in a manner that is optimal for the target. In these cases, the WACC should
reflect the business risk and financing of the target going forward.
Computing the value of the equity after determination the enterprise value
This is straightforward calculation that relies upon the definition of enterprise value as the value
of cash flows available to all providers of capital. Since debt and equity are the sources of
capital, it follows that enterprise value (V) equals the sum of debt (D) and equity (E) values:
V=D+E
Therefore, the value of equity is simply enterprise value less the value of existing debt:
E=V–D
where debt is the market value of all interest-bearing debt outstanding at the time of
the acquisition.
The circumstances of each transaction will dictate which of these approaches is most
reasonable.
Of course, if the target’s business risk somehow changes because of the merger, some
adjustments must be made to all of these approaches on a judgment basis. The key
concept is to find the WACC that best reflects the business and financial risks of the
target’s cash flows.
42
Market Multiples as Alternative Estimators of Terminal Value

Given the importance attached to terminal value, analysts are wise to use several approaches in
estimating terminal value. A common approach is to estimate terminal value using market
multiples derived from information based on publicly traded companies. The logic behind a
market multiple is to see how the market is currently valuing an entity based on certain
benchmarks related to value rather than attempting to determine an entit y’s inherent value. The
benchmark used as the basis of valuation should be something that is commonly valued by the
market and highly correlated with market value. For example, in the real estate market, dwellings
are frequently priced based on the prevailing price per square foot of comparable properties. The
assumption made is that the size of the house is correlated with its market value.
Other Valuation Methods
In literature the DCF method is quite detailed described, but it should be also known, that
there are other methods that provide useful complementary information in assessing the
value of a target.
Book value
May be appropriate for firms with no intangible assets, commodity-type assets valued at market,
and stable operations.
Limits to this method:
- This method depends on accounting practices that vary across firms.
- Ignores intangible assets like brand names, patents, technical know-how, and managerial
competence.
- Ignores price appreciation due, for instance, to inflation.
- Invites disputes about types of liabilities.
- Book value method is backward looking. It ignores the positive or negative operating prospects
of the firm and is often a poor proxy for market value.
Liquidation value - the sale of assets at a point in time.

May be appropriate for firms in financial distress, or more generally, for firms whose operating
prospects are very cloudy. Requires the skills of a business mortician rather than an operating
manager.
43
Limits to this method:

- Difficult to get a consensus valuation. Liquidation values tend to be highly appraiser specific.
- Key judgment: How finely one might break up the company: Group? Division? Product line?
Region? Plant? Machines?
- Physical condition, not age, will affect values. There can be no substitute for an on-site
assessment of a company’s real assets.
- May ignore valuable intangible assets.
Replacement-cost value
In the 1970s and early 1980s, during the era of high inflation in the United States, the Securities
and Exchange Commission required public corporations to estimate replacement values in their
10-K reports. This is no longer the case making this method less useful for U.S. firms but still is
useful for international firms where the requirement continues.
Often cited to explain the merger wave of 1970s and early 1980s. Since stock market values
tended to be less than replacement cost, buyers seemed to be realizing “bargain prices”, “It’s
cheaper to buy than build.” This seems unlikely to be an explanation for the merger boom of the
1990s.
But comparisons of replacement costs and stock market values ignore the possible reasons for
the disparity: overcapacity, high interest rates, oil shocks, inflation, etc. Replacement cost
estimates are not highly reliable, often drawn by simplistic rules of thumb. Estimators
themselves (operating managers) frequently dismiss the
estimates.
Market value of traded securities
- Most often, this method is used to value the equity of the firm (E) as stock
price × outstanding shares. It can also be used to value the enterprise (V) by
adding the market value of debt (D) as the price per bond × number of bonds
outstanding.
- Helpful if the stock is actively traded, followed by professional securities analysts, and if the
market efficiently impounds all public information about the company and its industry. Rarely do
44
merger negotiations settle at a price below the market price of the target. On average, mergers
and tender offers command a 30% to 50% premium over the price one day before the merger
announcement. Premiums have been observed to be as high as 100% in some instances. Often
the price increase is attributed to a “control premium. ” The premium will depend on the rarity of
the assets sought after and to what extent there are close substitutes for the technology, expertise,
or capability in question, the distribution of financial resources between the bidder and target, the
egos of the CEOs involved (the hubris hypothesis), or the possibility that the ex ante target price
was unduly inflated by market rumors.
- Less helpful for less well-known companies with thinly or intermittently traded stock.
- Not available for privately held companies.
- Ignores private information known only to insiders or acquirers who may see a special
economic opportunity in the target company. Remember, the market can efficiently impound
only public information.
Since the market price of a bond is frequently close to its book value, the book value of debt is
often used as a reasonable proxy for its market value. Conversely, it is rare that book value per
share of equity is close enough to its market price to serve as a good estimate.
Goodwill
The assets of a going concern usually include goodwill, that is, the reputation a business enjoys
with its customers, which gives the business value over and above the value of its physical
assets. In acquisition and merger by absorption, where an existing company completely takes
over another one, the inherent goodwill which is attached to the name and reputation of the
business is usually valued by accountants using either super-profit method or total capitalization
method.
While the super-profit method depends on the ability of the business to earn a rate of profit in
excess of the 'normal' rate based on the balance sheet value of the net tangible assets, in total
capitalization method, the total net profit is capitalized and the value of the tangible assets is
deducted there from leaving the balance sheet value of the goodwill.
On the other hand, in a merger by consolidation where a new company emerges, the discounted
momentum value is recommended since the benefits to be gained from purchasing goodwill fail
as that goodwill gradually ceases to exist, while other benefits are gained from new goodwill
created by the new company.
45
Marriage Value
A merger will make economic sense to the acquiring firm if its shareholders benefit. Thus,
considerable entrepreneurial effort is devoted to creating and adding value; one firm may take
over another believing that the combined firm will be more valuable than the two separate
entities. Similarly a real estate developer may assemble, through a series of discrete purchases, a
site that can yield additional value when developed as an entity. Within the area of valuation, this
is referred to as “marriage value” or “abutter/enhancement value” This situation reflects the
recognition that by combining or recombining two assets - legally or physically – it may be
possible to create a third asset that is more valuable than the sum of parts. Perhaps, the economic
advantage represents the benefits resulting from operating efficiencies and synergy when two
firms merge.
Valuation of marriage or enhancement value, though difficult in practice, may involve several
steps: identification of the value created or abutters, before - and - after analysis of the potential
for marriage value or enhancement value in merger and acquisition, and reporting of the
conclusion to the acquiring and acquired firm respectively. Enhancement or marriage value is the
amount by which the value of a property is increased through assemblage of another property
into the same ownership. This is distinct from market value in that it is an additional amount that
may be fully achieved in the event that the advantage in negotiation goes entirely to the owner of
the subject.
For example, if the acquiring firm pays the value of the acquired firm, then the entire advantage
of marriage value in merger will accrue to the shareholders of the acquiring firm. In practice, the
acquiring and the acquired firm may share the economic advantage between themselves.
Nonetheless, it depends on each party's negotiation and bargaining position or strength. And,
property valuers must, on continual basis, sharpen their skills to meet the needs of corporate
clients in this regard.
Valuation in a merger: Determination of share exchange ratio

1. Net Value Asset (NAV) Method
NAV is the sum total of value of asserts (fixed assets, current assets, investment on the
date of Balance sheet less all debts, borrowing and liabilities including both current and
likely contingent liability and preference share capital). Deductions will have to be made
46
for arrears of preference dividend, arrears of depreciation etc

The three steps necessary for valuing share are:
⎫ Valuation of assets
⎫ Ascertainment of liabilities
⎫ Fixation of the value of different types of equity shares.
2. Yield Value Method

This method also called profit earning capacity method is based on the assessment of
future maintainable earnings of the business. While the past financial performance serves
as guide, it is the future maintainable profits that have to be considered. Earnings of the
company for the next two years are projected (by valuation experts) and simple or
weighted average of these profits is computed
3. Market Value Method
This method is applicable only in case where share of companies are listed on a
recognized stock exchange. The average of high or low values and closing prices over a
specified previous period is taken to be representative value per share.
COMPARABLES APPROACHES
In the comparable companies or comparable transactions approach, key relationships are

calculated for a group of similar companies or similar transactions as a basis for the valuation of
companies involved in a merger or takeover. This approach is widely used, especially by
investment bankers and in legal cases. The theory is not complicated. Marketplace transactions
are used. It is a commonsense approach that says that similar companies should sell for similar
prices. This straightforward approach appeals to businesspersons, to their financial advisers, and
to the judges in courts of law called upon to give decisions on the relative values of companies in
litigation. For a full elaboration of this approach, emanating from considerable application in
court cases.
47
COMPARABLE COMPANIES ANALYSIS
First, a basic idea is in a simple setting followed by application to actual companies in an M&A
setting. Table 9.1 a illustrates the comparable companies approach. We are seeking to place a
value on company W.We find three companies that are comparable. To test for comparability, we
consider size, similarity of products, age of company and recent trends among other variables.
Table 9.1a
Comparable companies ratios(W is compared with companies A,B,C)
RATIO COMPANY A COMPANY B COMPANY C AVERAGE
Market/sales 1.2 1.0 0.8 1.0
Market/book 1.3 1.2 2.0 1.5
Market/net 20 15 25 20
income
=price/earning
s ratio
Assume that companies A,B and C meet most of our comparability requirements. We then
calculate the ratio of the market value of shareholders equity to sales, the ratio of the market
value of equity to the book value of equity and the price/earnings ratio for the individual
companies. The resulting ratios are given in table 9.1a.These ratios are then averaged, and the
average ratios are applied to the absolute data for company W. For the averages to be
meaningful, it is important that the ratios we calculate for the company be relatively close in
48
value. If they are greatly different, which implies that the dispersion around the average is
substantial, the average (a measure of central tendency)is not meaningful. In the example given,
the ratios for the three comparable companies do not vary widely.Hence,it makes some sense to
apply the averages.
We postulate that for a relevant recent time period, company W had sales of $100 million, a book
value of $60 millon,and a net income of $5 million as shown in table 9.1b.we next apply the
average market ratios from table 9.1a to obtain the indicated value of equity for company W. We
have three estimates of the indicated market value of equity for company W.
One of the advantages of the comparable companies approach is that it can be used to establish
valuation relationships for a company that is not publicly traded. This is a method of predicating
what its publicly traded price is likely to be. The methodology is applicable in testing for the
soundness of valuations in mergers also. The buyer and the seller in a merger seek confirmation
that the price is fair in relation to the values placed on other companies. For public companies,
the courts will require such a demonstration if a suit is filed by an aggrieved shareholder.
TABLE 9.1b APPLICATION OF VALUATION RATIOS TO COMPANY W
Actual recent data for Average market ratio Indicated value of equity(in
company W millions)
Sales = $100 1.0 $100
Book value of equity = 60 1.5 90
Net income =5 20 100
Average =$97
49
COMPARABLE TRANSACTIONS ANALYSIS
The data in table 9.1a can be reinterpreted to illustrate the comparable transactions approach. The
data would then represent companies involved in the same kind of merger transactions as
company W. In connection with merger transactions, a clarification should be made. when the
term market is used, it does not refer to the prevailing market price of the companies common
stock before the merger announcement. In this context ,”market” refer to the transaction price in
a deal recently completed. Typically, merger transactions involve a premium as high as 30% to
40% over the prevailing market price (before news of the merger transaction has leaked out).The
relevant valuation for a subsequent merger transaction would be the transaction prices for
comparable deals.
Now let us reinterpret table 9.1b as shown in table 9.2a which covers comparable transactions.
We postulate that the premiums over market that were paid caused the multiples (ratio) to be
increased. We now view the companies as targets in acquisitions. The market values are now
interpreted as the transaction market prices that were paid when these companies were acquired.
Before a merger transaction, the prevailing market prices of companies include some probability
that they will be acquired. But when they are acquired, the transaction price reflects the actual
takeover event. Because takeover bids typically involve a premium over prevailing market
prices, we accordingly illustrate this in the multiples reflected in table 9.2b.we now observe that
the average transaction ratios for the comparable transactions have moved up. The indicated
market value of company W is now $114,compared with $97,reflecting a premium of 17.5%
over general market valuation relationships.
The practical implication of this is that if company W here going to be purchased and no
comparable transactions had taken place, we would take the comparable companies approach as
illustrated in table 9.1a and 9.1b.however,this would be only a starting point. Some merger
negotiations would follow and probably some premium would be paid over prevailing market
prices for the comparable companies.
Table 9.1a through 9.2b illustrate the comparable companies and comparable transactions
approaches using the ratios of market value of equity to book value, market value to sales, and
market value to net income of the company. In some situations, other ratios might be employed
50
in the comparable companies or comparable transactions approach. Additional ratios could

include sales or revenue per employee, net income per employee, or assets needed to produce $1
of sales or revenue. Not that market values are are not include in the ratios just listed. The
additional ratios provide information on supplementary aspects of performance of the companies.
This additional information could be used for interpreting or adjusting the average multiples
obtained by using the comparables companies or comparables transactions approaches. Our
experience has been that in actual merger or takeover transactions investment bankers employ
the comparable companies approach and the comparable transactions approach and develop
additional comparative performance measures, as well.
TABLE 9.2a
COMPARABLE TRANSACTION RATIOS (COMPANY W IS COMPARED WITH

COMPANIES TA,TB AND TC
RATIO COMPANY TA COMPANY COMPANY TC AVERAGE

TB
MARKET/SALES 1.4 1.2 1.0 1,2
MARKET/BOOK 1.5 1.4 2.2 1.7
MARKET/NET 25 20 27 24
INCOME=PRICE/EARNIN
G RATIO
51
TABLE 9.2 b
APPLICATION OF VALUATION RATIOS TO COMPANY W
ACTUAL RECENT DATA FOR AVERAGE INDICATED VALUE OF

COMPANY W TRANSACTION EQUITY
MULTIPLE
SALES = $100 1.2X $ 120
BOOK VALUE OF EUITY= 60 1.7X 102
NET INCOME =5 24X 120
AVERAGE = $114
52
CAUSES FOR FAILURE OF MERGERS AND ACQUISITIONS

It is clear from the findings of the earlier scientific studies and reports of consultants that
M&As fail quite often and consequently, failed to create value or wealth for shareholders of
the acquirer company. A definite answer as to why mergers fail to generate value for
acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some
of the important reasons for failures of mergers are discussed below:
Size Issues: A mismatch in the size between acquirer and target is one of the reasons found
for poor acquisition performance. Many acquisitions fail either because of ‘acquisition
indigestion’ through buying too big targets or by not giving the smaller acquisitions the time
and attention it required Moreover, when the size of the acquirer is very large when
compared to the target firm, the percentage gains to acquirer will be very low when compared
to the higher percentage gains to target firms. They find that the smaller acquirer companies
do more profitable acquisitions while larger acquirer companies do deals that cause their
shareholders to lose acquisitions.
Diversification: Very few firms have the ability to successfully manage the diversified
businesses. Lot of studies found that acquisitions into related industries consistently
outperform acquisitions into unrelated around 42% of the acquisitions that turned sour were
conglomerate acquisitions in which the acquirer and acquired companies lacked familiarity
53
with each other’s businesses. Unrelated diversification has been associated with lower
financial performance, lower capital productivity and a higher degree of variance in
performance for a variety of reasons including a lack of industry or geographic knowledge, a
lack of focus as well as perceived inability to gain meaningful synergies. Unrelated
acquisitions which may appear to be very promising may turn out to be a big disappointment
in reality. For example, Datta et al. find that the presence of multiple bidders and the
conglomerate acquisitions have a negative impact on the wealth of the bidding shareholders.
Poor Organization Fit: Organizational fit is described as “the match between administrative
practices, cultural practices and personnel characteristics of the target and acquirer” states
that organisation structure with similar management problem, cultural system and structure
will facilitate the effectiveness of communication pattern and improve the company’s
capabilities to transfer knowledge and skills. Need for proper organization fit is stressed by
management. Mismatch of organization fit leads to failure of mergers.
Poor Strategic Fit: A Merger will yield the desired result only if there is strategic fit
between the merging companies. But once this is assured, the gains will outweigh the losses.
Mergers with strategic fit can improve profitability through reduction in overheads, effective
utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus
cash for expanding business with higher returns. But many a time lack of strategic fit
between two merging companies, especially lack of synergies results in merger failure.
Strategic fit can also include the business philosophies of the two entities (return on
investment versus market share), the time frame for achieving these goals (short-term versus
long term) and the way in which assets are utilized high capital investment or an asset
stripping mentality
Striving for Bigness: Size is an important element for success in business. Therefore, there is
a strong tendency among managers whose compensation is significantly influenced by size to
build big empires the concern with size may lead to acquisitions. Size maximizing firms may
engage in activities which have negative net present value Therefore when evaluating an
acquisition it is necessary to keep the attention focused on how it will create value for
shareholders and not on how it will increase the size of the company. finds that the results of
his study are consistent with the takeovers being motivated by maximization of management
54
utility reasons, rather than by the maximization of shareholders wealth.
Poor Cultural Fit: The relationship between cultural fit and acquisition implementation is
highly related. It is difficult to undergo a successful implementation without adequately
addressing the issues of cultural fit. Cultural fit between an acquirer and a target is often one
of the most neglected areas of analysis prior to the closing of a deal. However, cultural due
diligence is every bit as important as careful financial analysis. Lack of cultural fit between
the merging firms will amount to misunderstanding, confusion and conflict.
Limited Focus: If merging companies have entirely different products, markets systems and
cultures, the merger is doomed to failure. Added to that as core competencies are weakened
and the focus gets blurred the effect on bourses can be dangerous. Purely financially
motivated mergers such as tax driven mergers on the advice of accountant can be hit by
adverse business consequences. Conglomerates that had built unfocused business portfolios
were forced to sell non-core business that could not withstand competitive pressures. The
Tatas for example, sold their soaps business to Hindustan Lever i.e. merger of Tata Oil Mill
Company with Hindustan Lever Limited (Banerjee [7]).
Failure to Examine the Financial Position: Examination of the financial position of the
target company is quite significant before the takeovers are concluded. Areas that require
thorough examination are stocks, saleability of finished products, value and quality of
receivables, details and location of fixed assets, unsecured loans, claims under litigation, and
loans from the promoters. A London Business School study in 1987 highlighted that an
important influence on the ultimate success of the acquisition is a thorough audit of the target
company before the takeover (Arnold [5]). When ITC took over the paper board making unit
of BILT near Coimbatore, it arranged for comprehensive audit of financial affairs of the unit.
Many a times the acquirer is mislead by window-dressed accounts of the target
Failure to Take Immediate Control: Control of the new unit should be taken immediately
after signing of the agreement. ITC did so when they took over the BILT unit even though
the consideration was to be paid in 5 yearly instalments. ABB puts new management in place
on day one and reporting systems in place by three weeks
Failure of Top Management to follow Up: After signing the M&A agreement, the top
55
management should be very active and should make things happen. Initial few months after
the takeover determine the speed with which the process of tackling the problems can be
achieved. It is very rarely that the bought out company is firing on all cylinders and making a lot
of money. Top management follow-up is essential to go with a clear road map of actions
to be taken and set the pace for implementing once the control is assumed.
Failure of Leadership Role: Some of the roles leadership should take seriously are
modeling, quantifying strategic benefits and building a case for M&A activity and
articulating and establishing high standard for value creation. Walking the talk also becomes
very important during M&As.
Conclusions
Worlds market changes very fast. Each day a lot of companies are launched and closed at
the same time. They supply thousands of different types of product and services. During
the lifecycle of each company they have to improve their quality, fight with their competitors
and, of course, get high profit. Nowadays companies are connecting with each other, to be
bigger, to be able to achieve new goals. There is description of mergers and acquisitions as a
possibilities of connection between two or more companies or organizations in article above.
These can be done on national or international area. It is easier to survive on the market when the
company has more resources and capital than other company. To make an M&A successfully it
should be fulfilled long list of different criteria.
This paper summarizes information on how corporate business entity can be valued for
mergers and acquisitions. It shows what business valuations really is, and how it is used
while mergers and acquisitions. There are shown steps for M&A and for valuating
businesses before doing M&A. After analyze of several method of valuation it is now
more explicit that knowledge of valuer is important and has to be wide and up to date, to
achieve the concrete goal.
56
References
Aluko, Bioye Tajudeen; Corporate business valuation for mergers and acquisitions;
International Journal of Strategic Property Management; 2005
Bayrak; Valuation of firms in mergers and acquisitions; University of Pennsylvania; 2003
Buckley Peter J. , Pervez N.Ghauri - International M&A , 2002
Chaplinsky, Schill; Methods of valuation for mergers and acquisitions; University of Virginia
Darden School Foundation, Charlottesville, VA; 2000
Foster Reed, S., Lajoux Reed A. - The Clasic M&A Handbook, The Art of M&A; A Merger and
Acquisition Buyout Guide 3rd Edition
Investopedia: Mergers and Acquisitions; http://www.investopedia.com/university/mergers/;
05.12.2008
Kai Lucks ,Reinhard Meckl - International M&A. 2002
Schramm, J. – Education For HR, HRMagazine, September 2005
Wikipedia: Mergers and Acquisitions; http://en.wikipedia.org/wiki/Mergers; 05.12.2008
Wikipedia: Business Valuation; http://en.wikipedia.org/wiki/Business_valuation; 05.12.2008
57
Yan Yun L., Möller J., Malucha M.; “Factors affecting the role of HR managers in international
mergers and acquisitions: skills, abilities and competencies of HR managers”; University of
Kassel; 2008
58

Valuation of M&A Deals

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Valuation of M&A Deals

Uploaded by

Copyright:

Available Formats

Valuation of mergers and acquisitions

I feel highly privileged to express my sincere gratitude to my economics professor PANKAJ

I am also delighted to acknowledge the library staff of IIPM New Delhi.

1)Equity shares in the transferee company,

2) Debentures in the transferee company,

4)A mix of the above modes.

Classifications Mergers and Acquisitions

a)A merger in which two firms in the same industry combine.

a) A merger in which two firms in unrelated businesses combine.

4) Cross-border (International) M&As

M&A Activities in India:

M&A Activities in India:

2) Hindalco acquired novelis: 6$ billion

● Cross border M&A totaled 8.2 ban $ compared to 18.7 ban $

Acquire Target Country Deal Industry

Tata Steel Corus Group UK 12000 Steel

Hidalgo Novelist canada 5982 steel

Daewoo Korea 729

Beta harm Germany 597 Pharmaceutical

Suzlon Hansen Belgium 565 Energy

HPCL Kenya 500

Ranbaxy Terapia SA Romania 324 Pharmaceutical

Tata Steel NatSteel Singapore 293 steel

Videocon Thomson SA France 290 electronics

It is reasonable to assume that if a business were sold in a hypothetical sales

Mergers and acquisitions

Reasons for M&A

3) It helps to limit the severity of competition by increasing the company's market

One or more features would generally be available in each merger where

(2) From the standpoint of managers

(3) Promoter’s gains

(4) Benefits to general public

(c) General public

1) Particulars about transferee and transferor companies ;

Consider it in Board Meeting.

Apply to Court for direction to call General Meeting.

b) A true copy of the Company’s latest audited balance sheet

High Court Directions for Members ‘Meeting:

Approval of Registrar of High Court to Notice for Calling the

Send notices of General Meeting to Members/ shareholders with

Notice can be by way of Advertisement also

Holding the Shareholders’ General Meeting and Passing the

Filing of Resolutions of General Meeting with Registrar of

Report the result of the meeting to Court:

Move Court for approval of the scheme by filing petition in 7 days in

Hearing of Petition & Confirmation of Scheme

Filing of Court Order with ROC by both the Companies:

Transfer of the Assets & Liabilities

Preservation of Books & Papers of Amalgamated Company

Business valuation in mergers and acquisitions

the oil and gas,

conglomerates sectors of the economy

operating licenses from being cancelled.

Some of these professionals could also assist in the negotiation process.

The Cost Of Equity Financing

Calculating and Interpreting Results

Valuation methodologies, issues and problems

in order to give consistent advice.

Discounted Cash Flow (DCF)

It is important to realize that these fundamental concepts work equally well

when valuing an investment project as they do in an M&A setting.

The cash-flow forecast should be grounded in a thorough industry and