Merger

IndiaBulls Housing Finance Ltd. (IHFL), a financial services company, is looking to merge with
another financial services company, for the purpose obtaining synergy in operations.

1) Finally after all analysis,you found a target company - Lakshmi Vilas Bank (LVB). Following are
some important financials:

All figures in Lacs

Balance Sheet IHFL LVB

Current Assets 14 10
Fixed Assets (Net) 10 5
Total 24 15
Equity capital 10 8
Retained earnings 2 0
14% long-term debt 5 3
Current liabilities 7 4
Total 24 15

All figures in Lacs

IHFL LVB
Income Statement
Net Sales 34.5 17
Cost of Goods sold 27.6 13.6
Gross profit 6.9 3.4
Operating expenses 2 1
Interest 0.7 0.4
Earnings before taxes 4.2 2.0
Taxes @ 50% 2.1 1.0
Earnings after taxes (EAT) 2.1 1.0
 Other Information
No. of Equity shares 1 0.8
Dividend Payout Ratio 40% 60%
Market Per Share 40 15

Determine whether the merger is beneficial for IHFL.

2. Given are some popular M&A deals in India. Your task is to identify and select the synergy most likely to be produced in the
deals from the drop-down list:

a. Indus Towers merged with Bharti Airtel: The firms had 4 out of 22 circles Pan-India overlap in
operations. Analysts expressed a potential growth outlook. The Tower Company's EV/EBITDA could
rerate. Industry-wide tariff hikes were also likely to improve revenues

b. Indiabulls Housing Finance Ltd. Merged with Lakshmi Vilas Bank: Due to the deal, Indiabulls
Housing will get access to a banking platform, essentially the liability franchisee. The merged bank will
also benefit from the efficiency of IHFL, which operates on a very low cost-to-income ratio of 12.7%
(as on FY18).

c. Dena Bank and Vijaya Bank merged with Bank of Baroda: The new Bank is expected to create a
globally competitive Bank by taking the advantages of economies of scale, synergies for the network,
low-cost deposits and subsidiaries. It is also expected to improve customer base, market reach,
operational efficiency and the capability to offer a wider bouquet of products and services for
customers.

d. IndusInd Bank merged with Bharat Financial (SKS Microfinance): After the merger, it will have
access to over 2.9 lakh centres of BFIL, largely in rural areas. Also, the bank's exposure to micro-
finance segment will improve to over 9 per cent from the current 2 per cent of the loan book.
e. Vodafone's merger with Idea Cellular: Original target brought forward by two years — ₹14,000
crore of run-rate costs and capex savings (₹8,400-crore opex and ₹5,600-crore capex) on an annual
basis by the second year post completion.

Tutorial Note:
Synergy refers to the idea that two companies when combined are worth more together than they are when valued
separately. There are broadly 3 different types of synergies in an M&A deal-
1. Revenue Synergy is achieved when the companies can sell more goods and services together, than individually. This
leads to a higher revenue for the merged entity, compared to their individual revenues.

2. Cost Synergy represents the overall cost savings due to combining businesses. Common ways to attract cost savings is by
reducing rent through shared offices, increasing capital utilisation, etc.

3. Financial Synergies relates to the company's cost of capital. Interest charged on debt taken by a smaller company is
higher due to higher risk. Merger with a larger company may possibly help in reduction of interest charged.
<<Select from Drop-Down List
Revenue Synergy
Cost Synergy

Financial Synergy
1)
Step 1) Calculation of Swap Ratio based on Market Price per share
Swap Ratio

Step 2) Pre-Merger EPS of Y Ltd

Step 3) Pre-merger EPS of X Ltd

No. of shares alloted to Y Ltd.

Total no. of shares after Merger
Earning after Merger
Post-merger EPS

Decision:

2)

a. Indus Towers merged with Bharti Airtel: The firms had 4 out of 22 circles Pan-India overlap
in operations. Analysts expressed a potential growth outlook. The Tower Company's EV/EBITDA <<Select from Drop-Down List
could rerate. Industry-wide tariff hikes were also likely to improve revenues

b. Indiabulls Housing Finance Ltd. Merged with Lakshmi Vilas Bank: Due to the deal,
Indiabulls Housing will get access to a banking platform, essentially the liability franchisee. The
merged bank will also benefit from the efficiency of IHFL, which operates on a very low cost-to-
income ratio of 12.7% (as on FY18).

c. Dena Bank and Vijaya Bank merged with Bank of Baroda: The new Bank is expected to
create a globally competitive Bank by taking the advantages of economies of scale, synergies for
the network, low-cost deposits and subsidiaries. It is also expected to improve customer base,
market reach, operational efficiency and the capability to offer a wider bouquet of products and
services for customers.
d. IndusInd Bank merged with Bharat Financial (SKS Microfinance): After the merger, it will
have access to over 2.9 lakh centres of BFIL, largely in rural areas. Also, the bank's exposure to
micro-finance segment will improve to over 9 per cent from the current 2 per cent of the loan book.

e. Vodafone's merger with Idea Cellular: Original target brought forward by two years —
₹14,000 crore of run-rate costs and capex savings (₹8,400-crore opex and ₹5,600-crore capex) on
an annual basis by the second year post completion.
lect from Drop-Down List
Revenue Synergy
Cost Synergy
Financial Synergy