Case Analysis ² Mergers and Acquisition

World Enterprises and Wheelrim and Axle Company
Submitted By:Amanjot Bhullar Dheeraj Aggarwal Maninder Pal Singh Pardeep Dahiya Sanchit Agarwal Simaranjit Tiwana Vishvasniya Rathee

‡ Given case is a classic example of Bootstrap effect of a merger between World Enterprises and Wheelrim and Axle Company. World Enterprises wants to enter into the merger just to have a temporary boost in its EPS without any other strategic real gains. ‡ Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. ‡ But in the given case, it is assumed that there are no real gains from the merger.

One of the largest, most critical, and most difficult parts of a business merger is the successful integration of the enterprise networks of the merger partners.

A new company is created. acquisition is frequently used to describe more friendly acquisitions. Merger The combination of two firms into a new legal entity. takeover is used to reference a hostile takeover where the company being acquired is resisting. or used in conjunction with the word merger. . Typically. In contrast. Acquisition The purchase of one firm by another so that ownership transfers There is no tangible difference between an acquisition and a takeover. Both sets of shareholders have to approve the transaction.the only difference is that each word carries a slightly different connotation. where both companies are willing to join together.Some key Definitions Takeover The transfer of control from one ownership group to another. both words can be used interchangeably .

TFL transferred its assets. ceased to exist.Key Definitions Continued ‡ Merger through Absorption: An absorption is a combination of two or more companies into an 'existing company'. . survived after merger while TFL. the acquired company transfers its assets. merger of Hindustan Computers Ltd. In this form of merger. liabilities and shares to the acquiring company for cash or exchange of shares. For example. (TCL). ‡ Merger through Consolidation: A consolidation is a combination of two or more companies into a 'new company'. Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd. an acquiring company (a buyer). all companies are legally dissolved and a new entity is created. an acquired company (a seller). Here. All companies except one lose their identity in such a merger. TCL. liabilities and shares to TCL. For example. absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. Hindustan Instruments Ltd.

Types of Mergers Horizontal A merger in which two firms in the same industry combine.The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger. Often in an attempt to control supply or distribution channels. Vertical A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to achieve economies of scale and/or scope. EXAMPLE. . EXAMPLE.An example of a vertical merger is a car manufacturer purchasing a tire company.

Types of Mergers Conglomerate A merger in which two firms in unrelated businesses combine. Conglomerate are much less popular now. EXAMPLE -takeover of Zain Africa by Bharti Airtel.One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company. Cross-border (International) A merger or acquisition involving a domestic and a foreign firm a either the acquiring or target company.Sun Pharma acquiring Israel's Taro . Vedanta Resources acquiring Cairn India from Cairn Energy and of course the latest -. EXAMPLES. Purpose is often to diversify the company by combining uncorrelated assets and income streams.

using these sums to acquire another business that would not only enhance its operations but would also reduce its tax liability . Acquiring another business might enable it to be able to increase its capacity relatively quickly. ‡ Economies of Scale ‡ Economies of scale are the advantage of large scale production that result in lower cost per unit produced. ‡ Accessing technology or skills ‡ A firm may be targeted for acquisition because it has specific skills within its staff or has a particular technology that would be useful to another business. ‡ Tax reasons ‡ Businesses are always looking for ways to reduce their tax exposure. A firm has large sums of money lying idle.Reasons for Mergers and Acquisitions ‡ Capacity ‡ Capacity refers to the amount of output that a firm is capable of producing given its existing assets.

Many acquisitions fail either because of 'acquisition indigestion' through buying too big targets or failed to give the smaller acquisitions the time and attention it required Lack of Research Acquisition requires gathering a lot of data and information and analyzing it. It requires extensive research. . Unrelated diversification has been associated with lower financial performance. lower capital productivity and a higher degree of variance in performance. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth Diversification Very few firms have the ability to successfully manage the diversified businesses.Reasons for Failure of Mergers and Acquisitions Size Issues A mismatch in the size between acquirer and target has been found to lead to poor acquisition performance.

68 billion). This makes it India's 11th largest Mergers and Acquisitions transaction till date. The all-share merger deal between the two Mukesh Ambani group firms was valued at about Rs 8.Recent Mergers and acquisitions Reliance Industries in March 2009 approved a scheme of amalgamation of its subsidiary Reliance Petroleum with the parent company. .500 crore ($1.

. 2008.HDFC BANK-CENTURION BANK OF PUNJAB: $2.510 crore ($2. HDFC Bank became the secondlargest private sector bank in India. The acquisition was also India's 7th largest ever.4 BILLION HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9. Centurion Bank of Punjab shareholders got one share of HDFC Bank for every 29 shares held by them. Post-acquisition.4 billion) in one of the largest mergers in the financial sector in India in February.

Merger Gain= PVab .Boot Strap Effect ‡ Bootstrap or Chain Letter is referred to generating earnings growth from purchase of slowly growing firms with low price earnings ratio instead of earnings growth due to capital investments or improved profitability. ‡ When there is no real gain created by the merger and no increase in the two firm s combined value.(Pva + PVb ) = PVab .

so the market value of World Enterprises after merger is the sum of separate values of the two firms . hence the firms should be worth exactly the same together as they are apart ‡ There is no revaluation of firm by investors.Key Assumptions ‡ Merger between the given firms will produce no economic benefit or real gain.

000.000 $500.000 $9.84 262.000 Merged firm $2.000 Wheelrim and Axle $2.1 Complete the table Particulars Earnings per share Price per share Price earning ratio Number of shares Total earnings Total market value World Enterprises $2.3 12.000 $5.000.50 $25 10 200.00 $40 20 100.000.67 $34.Q.000 $4.000 .172 $700.000 $200.

000 + 5.000 = $9.000.000.Working Notes Market Value and Total Earnings Calculations ‡ Total market value of merged firm = Market value of World enterprises + Market value of Wheel rim and Axle = 4.000 .000 = $700.000 + $ 500.000.000 ‡ Total earnings of merged firm = Earnings of world enterprises + earnings of Wheelrim and Axle = $200.

000/262.172 = 34.172 ‡ Price per share = Total market value/Number of shares = 9.67 = 262.33 .Working Notes Number of Shares and Price Per Share ‡ Number of shares = Earnings of merged firm/Earnings per share = 700.000.000/2.

33/2.67 = 12.Working Notes P/E Ratio Calculation ‡ Price-earnings ratio = Price per share/ Earnings per share = 34.86 .

172 100.2 How many shares of World enterprises are exchanged for each share of Wheelrim and Axle? ‡ Total shares offered by World enterprises to acquire Wheelrim and Axle = Number of shares of merged firm Number of shares of World enterprises before merger = 262.Q.000 = 162.81 .172/200.172 ‡ Shares exchanged for each share of Wheelrim and Axle = 162.000 = 0.

Q.000.76 .33 $5.364.000 = $567.172*$34.3 What is the cost of merger to World Enterprises ‡ Cost of merger = Shares offered * Market value of shares after merger Market value of acquired firm = 162.

000 ‡ Therefore.000*34.000 ‡ Market value of given shares after merger = Number of shares * Price per share = 100.000.33 = $3.000 = $(567000) .Q.000.4 What is the change in the total market value of the world enterprise shares that were outstanding before the merger ‡ Market value of given shares before merger = $4.000-4.433.433. change in market value = 3.

the earnings growth will fall dramatically. ‡ Obviously this cannot go forever. a characteristic example of Bootstrap effect. . then the financial manager may be able to puff up the stock price artificially. and at the point where it stops or slows down. ‡ But it will happen only on the temporary basis.Conclusion ‡ If the given deal. or the firm has to continue to expand via merger at the same compound rate. is able to fool the investors.