State the difference between Mergers & Acquisitions

ACQUISITIONS MERGERS

Meaning

An acquisition is a cycle wherein one organisation A merger is a cycle wherein more than
assumes or takes over the responsibility for another one organisation’s approach functions
organisation. as one.

Issuance of Shares

No new shares are issued in case of acquisitions. New shares are issued in case of
mergers.

Mutual Consent and Decisions

The choice of acquisitions is probably not shared, or of
mutual consent in nature; in the event that the acquiring
organisation assumes control over one more venture
without the acquired company’s assent, it is named an
unfriendly takeover or hostile takeover.
A merged business entity is settled
upon by common assent and mutual
consent of the involved organisations.
Rather it is a planned and friendly one.

Company’s Name

The obtained or acquired organisation, for the most part, The merged business entity works
works under the name of the parent organisation. under another name or a new name.
Sometimes, nonetheless, the previous company can hold
its original name, assuming the parent organisation
permits it.

Stature, by Comparison

The acquiring organisation is independently stronger in The merged companies are of similar
terms of financial capability than the acquired business. stature, operations, size, and scale of
business.

Power or Authority over the Other

The acquired company has no say in terms of power or There is harmony when it comes to
authority by the acquiring company. merged companies.

Examples

Tata Motors acquisition of Jaguar Land Rover Merging of Glaxo Wellcome and
SmithKline Beecham to
GlaxoSmithKline

Explain the role of P.E ratio in valuation.

The price-to-earnings ratio or P/E is one of the most widely used stock analysis tools by
which investors and analysts determine stock valuation. In addition to showing
whether a company's stock price is overvalued or undervalued, the P/E can reveal how
a stock's valuation compares to its industry group or a benchmark like the S&P 500
Index.
In essence, the price-to-earnings ratio indicates the dollar amount an investor can
expect to invest in a company in order to receive $1 of that company’s earnings. This is
why the P/E is sometimes referred to as the price multiple because it shows how much
investors are willing to pay per dollar of earnings. If a company was currently trading
at a P/E multiple of 20x, the interpretation is that an investor is willing to pay $20 for
$1 of current earnings.
 In short, the P/E ratio shows what the market is willing to pay today for a stock based
on its past or future earnings. A high P/E could mean that a stock's price is high
relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that
the current stock price is low relative to earnings.  
What are the different approaches to valuation
Business valuation professionals typically apply three approaches to valuing a business
the cost, market and income approaches ultimately relying on one or two depending on
the type of case and other factors

1. Cost Approach-The cost (or asset-based) approach derives value from the combined
fair market value (FMV) of the business’s net assets. This technique usually produces a
“control level” value, meaning the value to an owner with the power to sell or liquidate
the company’s assets. For that reason, a discount for lack of control (DLOC) may be
appropriate when using the cost approach to value a minority interest. This approach is
particularly useful when valuing holding companies, asset-intensive companies and
distressed entities that aren’t worth more than their net tangible value.

2. Market Approach-Under the market approach, the level of value that’s derived
depends on whether the subject company’s economic variables have been adjusted for
discretionary items (such as expenses paid to related parties). If the expert makes
discretionary adjustments available to only controlling shareholders, it may preclude
the application of a control premium. If not, the preliminary value may contain an
implicit DLOC.

3.Income Approach-When reliable market data is hard to find, the business valuation
expert may turn to the income approach. This approach converts future expected
economic benefits — generally, cash flow — into a present value. Because this approach
bases value on the business’s ability to generate future economic benefits, it’s generally
best suited for established, profitable businesses.

Short note Brand Valuation

A brand comprises tangible as well as intangible elements relating to the company's
style, culture, positioning, messages, promises and value proposition. Brand Valuation,
subsequently, is an estimate of the financial value of a brand. There is no universally
accepted method for determining brand value. But, each company uses a different
model. There are three main types of brand valuation methods - a) the cost approach b)
the market approach and c) the income approach. Brand valuation helps companies to
find a buyer when it wants to sell it, value the assets in the balance-sheet, and to provide
information to investors. Brand valuation comes in handy as security for a loan and tax
reasons. It is also a useful tool used in merger and acquisition (M&A) planning, joint
venture negotiations, litigation support services, secured borrowing transactions,
bankruptcy administration, etc.
Short note merger and reverse merger
A merger is a business deal where two existing, independent companies combine to
form a new, singular legal entity. Mergers are voluntary. Typically, both companies are
of a similar size and scope and both stand to gain from the transaction. Mergers happen
for a variety of reasons. They could allow each company to enter a new market, sell a
new product, or offer a new service. They can also reduce operational costs, improve
management, change their pricing models, or lower tax liabilities. Ultimately, however,
companies merge to increase size, scale, and revenue. In other words, mergers help
companies make more money. 

A reverse merger occurs when a privately-held business buys a publicly-held shell

company . The outcome of a reverse merger is that the privately-held entity merges
into the publicly-held shell. The private entity is eliminated and the shell company
becomes the sole remaining entity. This is a faster and less expensive alternative to
the initial public offering .  By taking this approach, the owners of a privately-held
business can take their company public. Since the transaction means that the
owners of the acquiree essentially take over the legal acquirer , it is considered a
reverse merger.
What factors will you consider for valuation of shares in merger or amalgamation. What are two
types of amalgamation methods?

 Nature of business.
 Economic policies of the Government.
 Demand and supply of shares. Rate of dividend paid.
 Yield of other related shares in the Stock Exchange, etc.
 Net worth of the company.
 Earning capacity.
 Quoted price of the shares in the stock market.
 Profits made over a number of years.
 Dividend paid on the shares over a number of years.
 Prospects of growth, enhanced earning per share, etc.

types
Amalgamation in the nature of merger: In this type of amalgamation, not only is
the pooling of assets and liabilities is done but also of the shareholders’ interests
and the businesses of these companies. In other words, all assets and liabilities of
the transferor company become that of the transfer company. In this case, the
business of the transfer or company is intended to be carried on after the
amalgamation. There are no adjustments intended to be made to the book values.
The other conditions that need to be fulfilled include that the shareholders of the
vendor company holding atleast 90% face value of equity shares become the
shareholders’ of the vendee company.
Amalgamation in the nature of purchase: This method is considered when the
conditions for the amalgamation in the nature of merger are not satisfied. Through
this method, one company is acquired by another, and thereby the shareholders’ of
the company which is acquired normally do not continue to have proportionate
share in the equity of the combined company or the business of the company which
is acquired is generally not intended to be continued. If the purchase consideration
exceeds the net assets value then the excess amount is recorded as the goodwill,
while if it is less than the net assets value it is recorded as the capital reserves.