You are on page 1of 53

Valuation of Target Firms

Approaches and Methods

Why value the target firm

Valuation of target firm is critical step in the process of M&A activity Often, acquirers tend to pay value for target firm much higher than their real orth! This happens either due to over"optimism a#out potential synergies or over estimation of one$s o n a#ility to create value in the target company or due to desperation to conclude the deal This may result in value destruction for the shareholders of acquiring company! %ence, very cautious #ut not pessimistic valuation of target company is a &ey step in the success of an acquisition

'oncept of value of a firm

(n financial theory, there are many concepts of the )Value$ of a company! *ot all of them are relevant from the point of vie of investment or deciding the )intrinsic value$ of the company For e+ample, #oo& value and replacement value are hardly of any relevance in valuation of a target company! Valuation of company needs to done &eeping in vie conte+t and o#,ective of valuation! the

Myths a#out valuation

Myth -. A valuation is an o#,ective search for /true0 value 1 1 Truth -!-. All valuations are #iased! The only questions are ho hich direction! much and in is

Truth -!2. The direction and magnitude of the #ias in your valuation directly proportional to ho pays you and ho much you are paid! Truth 2!-. There are no precise valuations

Myth 2!. A good valuation provides a precise estimate of value 1 1 1 1 Truth 2!2. The payoff to valuation is greatest hen valuation is least precise! Truth 3!-. One$s understanding of a valuation model is inversely proportional to the num#er of inputs required for the model! Truth 3!2. 4impler valuation models do much #etter than comple+ ones! 55!As ath 6amodaran

Myth 3. ! The more quantitative a model, the #etter the valuation

7asis of all Valuation Approaches

The use of valuation models are #ased upon 1 a perception that mar&ets are inefficient and ma&e mista&es in assessing value 1 an assumption a#out ho inefficiencies ill get corrected and hen these

(n an efficient mar&et, the mar&et price is the #est estimate of value! The purpose of any valuation model is then the ,ustification of this value!

7asic Approaches to Valuation

Asset"7ased Valuation Approach 8elative Valuation Approach 'apitali9ation of :arnings Approach 'ash Flo "7ased Valuation Approach ;nder each approach alternative methods of valuation are availa#le

Asset 7ased Valuation Approach

Assets 7ased Valuation Approach

This approach is #ased on the assumption that value of a company is sum of the values of its individual assets! Thus, it computes the value of a company #y adding up the values of the assets of the company! %o ever, the value of asset may #e estimated #y different methods. 7oo& Value Method 8evalued *et Assets Method 8eplacement Value Method <iquidation Value Method

7oo& Value Method

7oo& value of a firm is the #oo& value of all the assets minus the #oo& value of all lia#ilities 7oo& value of an asset is the historical cost of the asset, minus the depreciation provided so far on the asset! The amount of money it can fetch no is not relevant for #oo& value 7oo& value of the lia#ility is the amount paya#le on account of that lia#ility! The rate of interest on hich the de#t has #een raised is not considered at all! 7oo& value of the company is the total assets net of lia#ilities (t is a simple and highly o#,ective method of valuation! The #oo& value method is not used for valuation of the target company due to its o#vious limitations!

8evalued *et Assets Method

(n case, #oo& values don$t represent the true value of the assets due to changes in the prices or availa#ility of intangi#le assets that have not #een included in the list of assets, assets and lia#ilities may #e revalued and revalued net assets may #e ta&en as value of the company! 6uring valuation of assets, one may face the pro#lem of valuing intangi#le assets! (t is quite difficult to value #rands, customer loyalty and there may #e large element of su#,ectivity in the process of valuation particularly in the valuation of intangi#le assets! (ntangi#le assets may #e valued either on cost #asis or on earnings #asis! (f the company has purchased any intangi#le asset li&e #rand, valuation may #e done on cost #asis! Other ise, the e+tra normal earnings may #e attri#uted to the intangi#le assets and such earning may #ecome the #asis for valuation of intangi#le assets!

8eplacement Value Method

;nder the replacement method, valuation of a company is difference #et een the replacement value of the assets minus the replacement value of the lia#ilities! 8eplacement value of the asset is the amount that one ould #e required to spend to replace the asset #y identical assets in the identical condition as the e+isting assets! Ma,or limitation of this method is that in reality, identical assets may not #e availa#le or may not #e availa#le in similar condition, or only )ne $ assets are availa#le in the mar&et Moreover, the method ignores the intangi#le assets and also ignore the a#ility of a company to generate or destroy value! This method cannot #e used for services sector as the assets are limited that have any replacement value Another limitation is in the estimation of replacement value of the assets, may not very o#,ective! hich

<iquidation Value Method

The liquidation or #rea&"up value method estimates the value of firm as the sum of the amount that can #e reali9ed #y selling the assets of the company This method assumes that all the assets shall #e sold after M&A, hich is not realistic assumption as the valuation of a target company needs to done on )going"concern #asis$! This method also ignores intangi#le assets li&e good ill, etc! %o ever, this method may #e useful in case some under"valued piece of land! <iquidation value is also useful estimate of the minimum value of the target company! Thus, the target company may use this estimate of value hile negotiating its price ith the #idder company, as the floor price #elo hich it ill not sell itself!

8elative Valuation Method

8elative Valuation Method

The relative or comparative Valuation Method values the target company #y comparing it ith the valuation = mar&et value per share> of another company in the same industry or any compara#le company! This method assumes that the value of any asset can #e estimated #y loo&ing at ho the mar&et prices /similar0 or )compara#le0 assets The comparison may #e done using t o approaches. 1 'omparison 1 'omparison ith industry averages ith compara#le company

'omparison ith industry averages

4ince it is not easy to get e+actly similar company in the same industry, use of multiples li&e ?rice to :arnings =?:> ratio, ?rice to sales ratio or 7oo& to Mar&et Value ratio may #e used to estimate the value of the target company! <et us assume that ?: ratio of paint industry is 2@! (f the earning per share =:?4> of a paint company, hich is a target company for acquisition, is 8s! A, the value of the share could #e computed as 8s! -B@! <ogic #ehind using industry averages is that sooner or later individual company$s ratios ill converge ith the industry averages! This method has many limitation! (ndustry averages sometimes are very high or lo as compared to the ratios relevant for the company in question! For e+ample, during March 2@-@, ?: 8atios of Ces 7an&, (ndus(nd 7an&, <a+mi Vilas 7an& and Darur Vyasa 7an& ere -E!A, 2@, 2B!A and A!B! (f the #an&ing sector ?: is 2F, all the four #an&s ould #e over"valued if e use ?: ratio of #an&ing industry to value any of these #an&s! There is no empirical evidence to support that individual company$s ?: ratio converges ith industry ?: ratio

'omparison ith compara#le company

;nder this method, companies that are closely compara#le ith the target company are identified and their ratios #ecome the #asis of valuation instead of using industry ratios! A company can #e considered compara#le if its #usiness model, gro th rates, ris& elements, quality of management, customer #ase, etc! are similar to those of the target company! %o ever, it is difficult to identify a truly compara#le company! Another issue is that sometimes, latest &no n earnings or #oo& value or sales are used in computation! (deally, pro,ected values should #e used as future values are relevant in valuation!

(ncome Approach

(ncome Approach
Valuation of the target company may #e done on the #asis of its earning capacity! This is, theoretically, more appropriate as the investment is done in the company ith the o#,ective of getting earnings from the company There are t o methods under this approach 1 'apitali9ation of earnings method 1 6iscounted cash flo method!

'apitali9ation Method
;nder this method, the value of the target company is computed on the #asis of the multiple of its accounting earnings! Generally, e estimate the average annual earning ta&ing into accounting the current year$s earning and the estimated earnings for ne+t t o years! The average of these three years is ta&en as average annual earning for the company under valuation! The multiple for capitali9ation purposes is computed on the #asis of cost of capital for a company ith the given gro th rates in sales, earnings and or dividend payouts Value H Average Annual :arning I 'ost of capital here Average Annual :arning H J?resent earningK ne+t 2 years pro,ected earningLI3 Ma,or limitation of this method is that it is #ased on accounting profit hich su#,ect to a num#er of limitations! Another limitation is that it loo&s at the profits in the short run! Further, it is difficult to estimate accurately the cost of capital required for capitali9ation!

6iscounted 'ash Flo Method

6iscounted cash flo method is considered most appropriate for valuation of target companies, as it is #ased on multiple period future cash flo s! %o ever, this method requires collection of large amount of information in order to estimate pro,ected changes in income and e+penditure! Thus, this method can #e used if adequate information is availa#le a#out the company!

4teps in the process of using 6'F method

7usiness ?ro,ections 'ash Flo ?ro,ections eighted average cost of capital :stimation of

'omputation of ?V of pro,ected cash flo s

7usiness ?ro,ection
6efine time hori9on = M"-@ years> for pro,ection :stimate gro th rates in sales, income, etc! :stimate changes in pro,ected gro th :stimate changes requirements in or&ing capital in vie capital e+penditure of the =cape+>

?repare pro,ected financial statements = 74, ?&<>

?ro,ection of 'ash Flo s and WA''

'omputation of cash flo s #y ad,usting the profits 'omputation of any funding gaps and ho filled they ill #e

:stimation of cost of each of the sources of finance :stimation of WA'' #ased on proposed capital structure!

Why 6'F method is considered #etter than others

(t ta&es into account future earnings of the company, #ased on the plans, strategies, constraints and challenges (t ta&es into consideration cost of capital after considering the capital structure and the ris&s associated ith that company! (n this method, valuation is driven #y future #usiness plans, associated cash flo s and cost of capital! (ts ma,or limitation is the need for relia#le information a#out future cash flo s and cost of capital! (t is not easy to get relia#le information in this regard particularly for the acquiring company hich is e+ternal to the target company! Minor estimation errors may have significant effect on the valuation under 6'F method!

Mode of Financing the 6eal Funding options in acquisition

Acquisition as an (nvestment for gro th

M&A results in inorganic gro th for a #usiness enterprise! (nstead of ma&ing a greenfield investment #y setting up a ne unit, a company my choose to gro for e+pansion or diversification through the M&A route %o ever, M&A investments are considered ris&ier than the greenfield investments due to additional ris& of over"valuation of the target company and comple+ity of integrating the target company ith the #idder company! Therefore, sometimes the #idder company attempts to share the ris& ith the shareholders of target company #y offering its o n shares as part of the price for the target company! The shareholders of target company may prefer cash as it is more certain and quic&! Thus, the issue of mode of financing needs to #e settled

Mode of Financing
The shareholders of the target company need to #e paid for surrendering their o nership to the #idder company! Three elements can #e ,udiciously mi+ed to determine the mode of financing the acquisition These are. 'ash, :quity shares in Acquiring company and 6e#t!

'hoice of Mode of Finance

Availa#ility, cost and speed of e+ecution of the financing arrangement are the ma,or concerns that influence the decision regarding the financing mi+! Further, information asymmetry and valuation ris&s are also important determinants of choice #et een cash and equity! 'ash and issue of shares are the most commonly used for payment of value of target company! 4hare e+change is preferred #y #idder company hen stoc& mar&ets are #ullish as at that time share price of the #idder company is overpriced! 'ash is preferred mode of financing hen the #idder company is has idle cash or it #elieves that at present the company has access to lo cost de#t or it #elieves that its shares are under"valued at that time! (n case of large mergers, the mode of financing may also impact the capital structure of the #idder company and ta&e it a ay from the target capital structure! This may influence the choice of mode of finance

'ash as a mode of financing

More certain and ris& free mode of financing 4hareholders of target company prefer cash as they can ad,ust their portfolio as per their investment plans! (f the cash is paid out of e+isting availa#le funds, there is no dilution of earnings for the e+isting shareholders and no change in the control of the #idder! (f the cash is paid out #y raising ne de#t, then the e+isting shareholders may e+pect increase in :?4, if the rate of return on the investment in target company is higher than cost of de#t! 7ut increased de#t may increase the financial ris& of the #idder company!

Funding of cash offer

A cash offer may #e funded through. (nternal Accruals ?re"#id (?OIF?O 8ight issue ?rivate ?lacement and ?rivate :quity 7an& 'redit

(nternal Accruals
For most domestic acquisitions in (ndia, primary = and most of the times, entire> source of funding is internal accruals! /Acquisition is a game that is normally played #y cash"rich companies0 4ince (ndian #an&s are still not very enthusiastic a#out lending for acquisitions, internal accruals remain the primary source of funding for acquisition! :+amples of entire funding through internal accruals. %indalco acquired (ndal =2@@2>N M&M acquired ?un,a# Tractors = 2@@A>N 6a#ur (ndia acquired Fem 'are ?harma = 2@@E>N Oet acquired 4ahara = 2@@A>

?u#lic (ssue of shares

7idder may also use (?OIF?O to generate cash for payment of price to shareholders of target company (t is time consuming and e+pensive process! (f the #idder company ere to mo#ili9e funds after initiating the process of acquisition of a target company, it cannot complete the F?O process #efore the amount #ecomes paya#le to shareholders of target company! Thus, F?O should #e #rought out ell #efore the starting the process of acquisition and a ) ar chest$ should #e maintained for unspecified future acquisitions! Alternatively, #idder company may ta&e a #ridge loan and repay after the process of pu#lic issue is complete! (f the company comes out ith pu#lic issue for unspecified acquisition, mar&et may not ta&e the issue favoura#ly #ecause of uncertainty regarding the merits of the acquisition! :ven other ise, acquisitions are considered #y investors as ris&y investments! 4uch issue may fail unless the management of the co is highly respected in the mar&et! (f the pu#lic issue is announced after the acquisition announcement, #ridge loan can #e ta&en and later repaid out of the proceeds of the issue! %o ever, F?O is quite e+pensive proposition

8ight (ssue
8ight issue is an effective post acquisition route to mo#ili9e funds for repayment of #ridge loans ta&en from #an&s and financial institutions for acquisition! (t is used quite often! For e+ample Tata Motors, in 2@@E, came out ith right issue of 8s! B-BM crores for repayment of part of the short term #ridge loan ta&en for acquisition of Oaguar <and 8over <td! %indalco ith 8s! M@BE crores right issue for part repayment of #ridge loan for acquisition of *ovelis, *etherlands!

?rivate ?lacement and ?: funds

?rivate :quity funds are also illing to ta&e ris& and provide a via#le funding option for #idder companies! ?rivate placement of shares, as against pu#lic issue or right issue may #e useful in case the later are not li&ely to #e su#scri#ed fully = as in case of right issues e+amples given earlier> The process of ?rivate placement is very quic& ?: funds can invest in target co! as persons acting in concert along ith the acquirer and then a ,oint offer can #e made!

7an& 'redit and other #orro ings

7an& credit can also #e used for funding cost of acquisition! Among the #an&s in (ndia, private sector #an&s and foreign #an&s are more proactive in lending for acquisitions as compared to ?u#lic sector #an&s! Generally, for domestic acquisition, #an&s prefer to e+tend short"term finance through #ridge loans or commercial paper, they may also #e open to lending medium"term loans also! For cross #order acquisitions, e+ternal commercial #orro ing could also #e used for funding cash payments to shareholders of target company! Dingfisher used this method for acquiring Air 6eccan in 2@@A!

4hare :+change
:quity share e+change is one of the commonly used financing option for funding acquisition of target company! (n this method, a #idder company issues its shares to the shareholders of the target company in e+change of shares of the target company in a specified ratio &no as a s ap ratio and hence this method is commonly &no n as share s ap method! This mode ena#les sharing of the ris& and #enefits in reali9ation of #enefits of synergies This mode also serves the ta+ management o#,ectives of shareholders of target company as they may have to pay capital gain ta+ only hen they sell the shares of #idder company and not immediately! (n case, the acquiring company is an unlisted company, this method may not useful as the pricing of the acquiring company$s shares #ecomes difficult to determine! Moreover, 4:7($s Ta&eover code also permits share e+change only in case the acquiring company is listed company

:+change 8atio
4 ap ratio or e+change ratio is simply the ratio of the price offered for acquiring one equity share of the target company divided #y the valuation of one equity share of the acquirer company :+change ratioH Offer ?rice per shareI4hare ?rice of #idder company For e+ample, A7' <td has made an open offer to acquire 2@P of the equity capital QCR <td! at 8s! 2@@ per share! A7' <td! shares have #een valued at 8s! -@@ per share! The s ap ratio ill #e 2.-, i!e! 2 shares A7' <td ould #e issued to the shareholders of QCR for every one share of QCR <td tendered #y them and accepted #y A7' <td!

:+change 8atio. An e+ample

"ased !n the #a$uati!n !% & Ltd' ( $td has agreed t! !%%er Rs. )5 *er share %!r & Ltd. +he %!$$!,ing are the detai$s !% the t,! !-*anies Particulars X Ltd ( Bidder Co.) Rs. 500 Lakhs 50 Lakhs Y Ltd. (Target Co.) Rs. 100 Lakhs 20 Lakhs

Present Earnings Shares Outstanding Earning Per Share 10 5 Pri e Per Share 150 50 +he !%%er is .0/ *re-iu- a0!#e Pri e Earning 15 the *re1-erger -arket 10 *ri e !% & Ltd. S!' the agreed *ri e is 502 5030..04 )5. +he Rati! e( hange rati!4 )5 515040.6. !r 6. shares !% 7 Ltd %!r

(mpact of Merger on the :?4 of merged company. An :+ample

7ased on the valuation of C <td, Q ltd has agreed to offer 8s! 3M per share for C <td! The follo ing are the details of the t o companies Particulars X Ltd ( Bidder Y Ltd. (Target Co.) Co.) Present Earnings Shares Outstanding Rs. 200 Lakhs 50 Lakhs Rs. 50 Lakhs 20 Lakhs

Earning Per Share 6 2.50 Pri e Per Share )6 .0 E( hange Rati!4 .55)640.569. +hus' 10:.950;0.569320 $akhs< shares= +!ta$
Earnings4 250 Lakhs' >!. !% shares in1) -erged !-*an8 )0':.'950 Pri e Earning 12 ;50$akhs210:.950<' +hus' EPS4 250 Lakhs5)0.:.950 $akhs4 Rs. 6.10 *er Rati! share

(mplications and options of Target company

4ince shareholders of C <td, got @!MBA share in Q <td! for each share held in C <td! Thus, for them :?4 on each share held in target 'o! = C <td> is @!MBAS B!-@H 2!2B :arlier :?4 of C <td as 8s! 2!M@! 4o 4hareholders of C <td are at loss! They may not agree ith the valuation of C <td! (f #argaining results in agreed price of 8s! BM per share in C <td!, ne e+change ratioH BMIFBH@!A@3! Thus, BMIFB Q 2@ la&hsH -B,@F,2M@ shares in Q <td! need to #e issued to shareholders of C <td! Thus, the total no of shares in the merged company after this issueH M@ la&hsK -B,@F,2M@ H FB,@F,2M@! Thus, :?4 H 2M@ la&hsIFB,@F,2M@H3!T@! 4hareholders get 3!T@ Q @!A@3H2!AB, hich is higher than their earlier :?4 of 8s! 2!M@

(mplications for 7idder 'ompany

(t may #e o#served that the ?: ratio of the target company C <td! as initially 8s! -2! On merger, hen the agreed price for target company as fi+ed at 8s! 3M, its ?: ratio #ecame 3MI2!M@H-B! When the agreed price increased to 8s!BM, ne ?: ratio #ecame BMI2!M@H -E! This is higher than the ?: of #idder company =Vi9! -F>! This ill dilute the :?4 of the acquirer company! Then hat should #e the right offer price hich does not result in dilution of :?4 of acquiring company

%ighest Offer ?rice

%ighest price that the #idder company should #e the one any dilution in the :?4 of the #idder company! %ighest price can #e calculated #y solving the equation. ?: ratio of #idderH Offer ?riceI:?4 of Target co! (n this e+ample! ?: ratio of #idderH-F :?4 of Target co!H2!M, 4o ?: ratio of #idderH Offer ?riceI:?4 of Target co! -FHoffer priceI2!M Offer ?rice H -F Q 2!M@HB@ This is the highest price, if no synergy is li&ely after acquisition! The #idder co may #e illing to pay more than 8s! B@ if it e+pects synergies that ill increase earning and :?4 in the long run, once the M&A is fully implemented! hich does not result in

Future :arnings
The highest price computed earlier is valid only if it is assumed that current level of earnings of the t o #usinesses ill remain unchanged! That is to say that 2K-H3! 7ut the rationale #ehind most mergers is that it ill result in synergies and that 2K-U 3! (n the short run, one or the other company e+periences dilution in :?4, depending upon the relative #argaining po er of the companies and the agreed value of the target company! (f the com#ined earning of the t o companies after merger does not gro faster then dilution in the :?4 of the acquirer may not #e recovered and merger ill reduce value for the #idder company! Thus, the future earnings, rather than the immediate dilution in :?4 should determine hether or not the acquisition is orth hile! %o much, then should the acquiring company should #e illing to pay for the target companyV (t should also #e determined #y the e+pected gro th in the earnings of the acquiring company after the acquisition!

(mpact of gro th in future earning

Particulars Com a!" A Com a!" B

Current Assets ?i(ed Assets +!ta$ Assets Current Lia0i$ities "!nds EAuit8 Shares Ca*ita$ Retained Earnings +!ta$ Lia0i$ities and Ca*ita$ >!. !% !utstanding Shares Esti-ated >et In !-e EPS PE Rati! Share *ri e ;EPS 7 PE<

2'00'000 @'00'00 10'00'000 90'000 50'000 5'00'000 .'@0'000 10'00'000 50'000 1'00'000 Rs. 2 Rs. 25 50

1'50'000 10'00'000 11'50'000 )0'000 50'000 @'00'000 2'60'000 11'50'000 @0'000 @0'000 Rs. 1 Rs. 20 20

Assume that earnings of company A as gro ing at 2P per year #efore the merger and e+pected to gro at FP ith merger! (f this co! agrees to pay 8s! 2E per share for company 7, the e+change ratio ould #e 2EIM@ or @!MF share of company A for each share of company 7! Total no! of ne share of company A required to pay the value of company 7 H BB,E@@ = E@@@@ Q @!MF>! :?4 immediately after the merger ould #e 8s! -!T@ = -E@@@@I=M@@@@KBBE@@> The shareholders of company A ould e+perience an immediate dilution in :?4, hereas shareholders of 7 ould e+perience increase in :?4! %o ever, the impact may #e quite different two years after the merger!

Particulars o# A ltd

A#ter Merger

$it%out Merger

E(*e ted Earnings >u-0er !% shares EPS

2'02'26@ B1@00003;1.0)<C2D :6'@00 B50'000266@00D Rs.2.1.

1'06'060 B1000003;1.02<C2D 50'000 Rs.2.0@

:stimating impact of 4ynergy

Thus, the initial dilution in :?4 for #idder company may #e follo ed #y improvement in :?4 if there is adequate favoura#le effect on future earning due to synergy! %o ever, estimating the impact of synergy on future earnings is not easy to estimate! Therefore, #idder company tries to minimi9e the initial dilution in order to minimi9e the ris& of not #eing a#le to recover cost of initial the over"valuation of target company, in future! 4uch a policy reduces the ris& of e+isting shareholders of #idder company and sends the right signal to them!

7ootstrapping :?4
A #ootstrap is a small strap or loop at the #ac& of a leather #oot that ena#les you to pull the entire #oot on!, Wpulling yourself up #y your o n #ootstraps,W means to leverage yourself to success from a small #eginning!

7ootstrapping :?4 is practice here an acquirer #uys a company ith a lo :?4 ratio through a stoc& s ap in order to #oost the post"acquisition :?4 of the ne ly formed group and create a rise in the stoc& price! 4uch strategy may or& hen mar&ets are not efficient! <arge company ith high ?: ratio may acquire a company ith lo er ?: ratio, and o#tain immediate increase in :?4 of com#ined entity! This can happen even hen the #idder company agreed price of target company is higher than the mar&et value of the company!

7ootstrapping :?4. An :+ample

Particulars Present Earnings >! !% shares !utstanding Earning Per Share Market Pri e Per Share PE rati! Com a!" A 2'00'00'000 )0'00'000 .... )0 1@ Com a!" B )0'00'000 20'00'000 ..0 .0 10

Assu-e A !%%ers t! *a8 Rs. 60 *er share t! shareh!$ders !% "' ,hi h is ...../ ;*re-iu- 8!u *a8ing5-arket *ri e< ;10 5.0< higher than the -arket *ri e' it an sti$$ in rease it EPS. +he e( hange rati! ,i$$ 0e 605)040.))9. +his ,!u$d -ean that 20 $akhs 7 0.))94 1.'..'... shares ,i$$ 0e issued t! shareh!$ders !% ".

?ost merger :?4

Particulars A<+!ta$ Earnings "<>u-0er !% shares ;)0'00'0002 1.'..'...< C<Earnings Per Share ;EPS< ;A5"< E<Pri e Earning Rati! ;gi#en< E<Market Pri e *er share ; ..55 7 1@< ;C3E< Post Merger &alues 2')0'00'000 9.'..'... ..55 1@ )..:0

+here are t,! !nditi!ns %!r 0!!tstra**ing EPS a. PE rati! -ust n!t de $ine a%ter -erger. +his ,!u$d genera$$8 ha**en ,hen -arket d!es n!t rea t negati#e$8 t! the !#er1#a$uati!n !% target !-*an8 RICHA KUMAR

(mpact of Merger on shareholders ealth and 6eal 'haracteristics!

4ome of the deal characteristics that may influence impact of merger on shareholders of #idder and target company. Mode of ta&eover. Friendly or hostile Mode of Acquisition. Tender offer or merger (s the target firm small or large relative to the acquirer (s the acquirer regarded #y the stoc& mar&et very highly at the time of #idV (s the acquisition financed equity ith cash or the acquirer$s

(mpact of Merger on shareholders "4ome empirical evidence!

Friendly or hostile ta&eovers. %ostile ta&eovers are not necessarily a #ad ne s for shareholders of target companies Tender offer or merger. Tender offers made directly to shareholders of target company add greater value for its shareholders than that in case of mergers agreed in a friendly ay ith the management of the target company! 4i9e ratio. 8elatively small targets prove to #e #etter in post acquisition value creation! Mode of Financing. Fairly uniform evidence that cash or financed acquisition gives #etter returns to shareholders of target companies!

(mpact of Merger on shareholders of Target company "4ome empirical evidence!

The effect that mergers and acquisitions have on target shareholder returns has #een e+tensively researched! (t is idely proven that target firm shareholders en,oy large a#normal returns that are significantly and materially positive! The ealth increment is primarily due to the premium paid #y the acquiring company! (n fact, the premium has #een on an average around 3@P and goes even upto -@@P!

(mpact of Merger on shareholders of Bidder company "4ome empirical evidence!

Although there is evidence that the #idder ealth effects are small compared to target shareholder returns, the results are not as unam#iguous as they are for target shareholders! While some studies =particularly in :urope>, find slightly positive a#normal returns around the date of announcement of merger, most of the studies =particularly in ;4 and Asia> find negative returns or returns that are insignificantly different from 9ero for the shareholders of the acquirer company!

(t is primarily due to the fact that in most cases the potential impact of synergy and management enhancement are not enough to fully offset the premium paid to shareholders of target company! (n some #idding ars, the premiums paid are unreasona#ly high!