Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 1: Exchange Ratio Saviruchi Ltd (has 200000 shares outstanding) wants to acquire Durgabhavan Ltd(has 100000 shares outstanding), by exchanging its 1.6 shares for every share of Durgabhavan Ltd. Calculate the post-merger number of shares Solution: New Shares to be issued to Target = Exchange Ratio X Existing No. of shares of Target New shares to be issued to Durgabhavan = 1.6 X 100000 = 160000 Existing Shares of Saviruchi = 200000 Post-Merger Number of Shares = 200000 + 160000 = 360000 Exercise 2: Exchange Ratio Kelloggs Ltd is taking over Corn Flakes Ltd. The shareholders of Corn Flakes Ltd would receive 0.8 share of Kelloggs Ltd for each share held by them. No. of shares of Kelloggs Ltd before Merger is 250000 and No. of shares of Corn Flakes Ltd pre-merger is 175000. Calculate the post-merger no. of shares Solution: New shares to be issued to Corn Flakes = 0.8 X 175000 = 140000 Existing Shares of Kelloggs = 250000 Post-Merger Number of Shares = 250000 + 140000 = 390000 Exercise 3: Exchange Ratio Mylari Company is acquiring Harihara Company. Mylari will pay 0.5 of its shares to the shareholders of Harihara for each share held by them. Existing no. of Shares of Mylari is 500 Million and that of Harihara Co. is 250 Million. Calculate the post-merger number of shares Solution: New shares to be issued to Harihara = 0.5 X 250 = 125 Mn Existing Shares of Mylari = 500 Mn Post-Merger Number of Shares = 500 + 125 = 625 Mn Exercise 4: Exchange Ratio Rice Ltd acquires Wheat Ltd by exchanging one share for every two shares of Wheat Ltd. Calculate the post-merger number of shares of Rice Ltd. Outstanding, if pre-merger number of shares were as below: Solution: New shares to be issued to Wheat = 0.5 X 400 = 200 Existing Shares of Rice = 1000 Post-Merger Number of Shares = 1000 + 200 = 1200
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Rice Ltd 1000

Wheat Ltd 400

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 5: Exchange Ratio Based on the information given below ascertain the exchange ratio based on Net Assets Value: Slice Ltd (Acquirer) Total Assets External Liabilities Solution: Net Assets = Total Assets Liabilities Net Assets of Slice Ltd = 1000 400 = 600 Lacs Net Assets of Maaza Ltd = 500 200 = 300 Lacs Net Assets Ratio Exchange Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 300/600 = 0.5 = 0.5:1 i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd Exercise 6: Exchange Ratio Based on the information given below determine the exchange ratio based on Net Assets Value: Torino Ltd (Acquirer) Citra Ltd (Target) Fixed Assets Current Assets 13% Debentures Creditors Solution: Net Assets = Total Assets Liabilities Net Assets of Torino Ltd = (150+100) (100+100) = 50 Lacs Net Assets of Maaza Ltd = (100+50) (40+10) = 100 Lacs Net Assets Ratio Exchange Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2 = 2:1 150 100 100 100 100 50 40 10 1000 Lacs 400 Lacs Maaza Ltd (Target) 500 Lacs 200 Lacs

i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd Exercise 7: Exchange Ratio Determine the exchange ratio in case of below Merger, based on EPS proportion: Fanta Ltd(Acquirer) EPS Solution Exchange Ratio based on EPS proportion Exchange Ratio based on EPS proportion = EPS of Target Co / EPS of Acquiring Co = 50 / 100 = 0.5 Rs. 100 Sprite Ltd(Target) Rs.50

Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 8: Exchange Ratio Determine the exchange ratio in case of below Merger, based on EPS proportion: Thumsup Ltd(Acquirer) PAT Solution EPS = Profit after Tax / No. of Shares EPS of Thumsup Ltd = 6700000 / 100000 = Rs. 67 EPS of Mountaindew Ltd = 5450000 / 50000 = Rs. 109 Exchange Ratio based on EPS proportion = 109 / 67 = 1.63
Shareholders of Mountaindew will get 1.63 share of Thumsup for every share held in Mountaindew

Mountaindew Ltd(Target) Rs. 5450000 50000

Rs. 6700000

No. of shares 100000

Exercise 9: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Market Price of Dominos Ltd (Acquiring Co) Rs. 83 Market Price of Pizza Hut Ltd (Target Co) Rs. 44 Solution Exchange Ratio based on Market Price = Market Price of Target / Market Price of Acquiring Exchange Ratio based on Market Price = 44 / 83 = 0.53 Shareholders of Pizza Hut will get 0.53 share of Dominos Ltd for every share held in Pizza Hut Exercise 10: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Dosa Ltd(Acquirer) P/E Ratio Profit after Tax No. of Shares Solution Market Price = P/E Ratio X EPS Market Price = P/E Ratio X (Profit after Tax/No. of Shares) Market Price of Dosa Ltd (Acquiring Co) 5 X (2000000/100000) = 5 X 20 = 100 Market Price of Pizza Hut Ltd (Target Co) 10 X (1250000/50000) = 10 X 25 = 250 Exchange Ratio based on Market Price = 250 / 100 = 2.5 Shareholders of Idli will get 2.5 share of Dosa Ltd for every share held in Idli 5 Times Rs. 20 Lacs 100000 Idli Ltd(Target) 10 Times Rs. 1250000 50000

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 11: Exchange Ratio (VTU, MBA, June-2010, 10 Marks) Shanthisagar Ltd wishes to takeover Maheshprasad Ltd. The financial details of the two companies are as under: Particulars Shanthisagar Maheshprasad Equity Shares (Rs. 10 per share) 100000 50000 Share Premium Account 2000 Profit and Loss Account 38000 4000 Preference Shares 20000 10% Debentures 15000 5000 Total 173000 61000 Fixed Assets 122000 35000 Net Current Assets 51000 26000 Maintainable Annual Profit After Tax 24000 15000 For Equity Shareholders Market Price per Equity Share 24 27 Price Earnings Ratio 10 9 What offer do you think Shanthisagar Ltd could make to Maheshprasad Ltd in terms of exchange ratio, based on (i)Net Assets Value (ii)Earnings Per Share (iii) Which method would you prefer from Shanthisagar Ltds point of view? Solution i) Exchange Ratio based on Net Assets Value Shanthisagar Fixed Assets Net Current Assets Total Assets Less: 10% Debentures Less: Preference Shares Net Assets No. of Shares Net Assets per share 122000 51000 173000 15000 20000 138000 10000 13.8 56000 5000 11.2 Maheshprasad 35000 26000 61000 5000 Market Price?

Exchange Ratio based on Net Assets = 11.2/13.8 = 0.81 ii) Exchange Ratio based on EPS Profit No. of Shares Earnings per share 24000 10000 2.4 15000 5000 3

Exchange Ratio based on EPS = 3/2.4 = 1.25 iii) Exchange Ratio based on Market Price per share Market Price 24 27 Exchange Ratio based on MPS = 27/24 = 1.125
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 12: Exchange Ratio (VTU, MBA, Jul-2009, 3 Marks) Nandini Ltd is considering the acquisition of Heritage Ltd with stock. Relevant financial information is as below: Particulars Present Earnings (in thousands) Common Shares (in thousands) Earnings Per Share Price/Earnings Ratio Nandini Ltd Rs. 4000 2000 Rs. 2 12 Heritage Ltd Rs. 1000 800 Rs. 1.25 8

Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd. i) ii) Solution Nandini No. of shares (using EPS) Finding out Market Price through P/E ratio formula P/E Ratio = Market Price / EPS Solving for x, we get Market Price as Exchange Ratio = (10 X 1.2) / 24 = 12/24 = 1.5 No. of new shares to be issued = 1.5 X 800 = 1200 Exercise 13: EPS Management Based on the below data, calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Exchange Ratio 0.5 shares of acquiring company Iyangars Ltd to be given to shareholders of Target Company SLV Ltd for every one share of SLV Ltd held by them Profit after Tax of Iyangars Rs. 2500000 Profit after Tax of SLV Ltd Rs. 4500000 No. of outstanding equity shares of Iyangars Ltd 250000 No. of outstanding equity shares of SLV Ltd 180000 Solution EPS = PAT / No. Of shares Pre-Merger EPS of Iyangars Ltd = 2500000 / 250000 = Rs. 10 Pre-Merger EPS of SLV Ltd 4500000/180000 = Rs. 25 Post-Merger PAT = (2500000+4500000) = 7000000 Post-Merger No. of Shares = 250000 + (180000 X 0.5) = 250000 + 90000 = 340000 Post-Merger EPS = 7000000/340000 = Rs. 20.58
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

What is the ratio of exchange of stock? How many new shares will be issued? Heritage 800 8 = x/1.25 10

2000 12 = x/2 24

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 14: EPS Management Based on the below data, calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Kohinoor Ltd(Acquirer) Exchange Ratio PAT Share Capital each) Solution EPS = PAT / No. Of shares = PAT / (Share Capital/Par Value) Pre-Merger EPS of Kohinoor Ltd = 1000 / (500/10) = 1000/50 = Rs. 20 Pre-Merger EPS of IndiaGates Ltd = 800/ (100/2) = 800/50 = Rs. 16 Post-Merger PAT = (1000+800) = 1800 Lacs Post-Merger No. of Shares = 50 Lacs + (50 Lacs X 2) = 50 lacs + 100 Lacs = 150 Lacs or 1.5 Crores Post-Merger EPS = 1800/150 = Rs. 12 Exercise 15: EPS Management (VTU, MBA, Jun-2010, 10 Marks) Maggi Ltd is intending to acquire Knorr Ltd (by merger). The following information is available in respect of the companies: Particulars No. of Equity Shares Earnings after Tax Market Value per Share i) ii) Maggi Ltd 500000 Rs. 2500000 Rs. 21 Knorr Ltd 300000 Rs. 900000 Rs. 14 2:1 Rs. 1000 Lacs Rs. 5 Crores (Par Value Rs. 10 Each) Rs. 800 Lacs Rs. 1 Crore (Par Value Re. 2 IndiaGates Ltd(Target)

What is the present EPS of both companies? If the proposal merger takes place, what would be the new earnings per share for Maggi Ltd? (assuming that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market prices)

iii)

What should be the exchange ratio, if Knorr Ltd wants to ensure the same earnings to members as before the merger?

Solution i) Pre-Merger EPS Maggi PAT No. of shares EPS

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Knorr 900000 300000 3

2500000 500000 5

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

ii) Post-Merger EPS Post-Merger PAT = 2500000 + 900000 = 3400000 Exchange Ratio = 14/21 = 0.6667 Post-Merger No. of shares = 500000 + (300000 X .667) = 500000 + 200000 = 700000 Post-Merger EPS = 3400000 / 700000 = 4.85 iii) Exchange Ratio to maintain Current EPS 5 = 3400000 / Post-Merger No. of shares Therefore, Post-Merger No. of shares = 680000 Shares offered to Knorr = 680000 500000 = 180000 Exchange Ratio = 180000 / 300000 = 0.6 Exercise 16: EPS Management Sankranthi Ltd. is intending to acquire Deepavali Ltd. by merger and the following information is available in respect of the companies: Sankranthi Ltd. Number of equity shares Earnings after tax (Rs.) Required: (i) What is the present EPS of both the companies? (ii) If the proposed merger takes place, what would be the new earning per share for Sankranthi Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. Solution (i) Pre-Merger EPS Sankranthi Ltd. = Rs. 50,00,000/10,00,000 = Rs. 5 Deepavali Ltd. = Rs. 18,00,000 / 6,00,000 = Rs. 3 (ii) Number of Shares Deepavali limiteds shareholders will get in Sankranthi Ltd. based on market value per share = Rs. 28/ 42 X 6,00,000 = 4,00,000 shares Post-Merger No. of shares of Sankranthi = 10,00,000 + 4,00,000 = 14,00,000 shares Post-Merger Earnings per share = (Rs. 50,00,000 + 18,00,000) / 14,00,000 = Rs. 4.86 10,00,000 50,00,000 Deepavali Ltd. 6,00,000 18,00,000 28

Market value per share (Rs.) 42

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 17: EPS Management (VTU, MBA, Jan-2010, 10 Marks) Trupti Ltd is being absorbed by Dhara Ltd, on a share exchange basis. Relevant financial data are as follows: Particulars PAT Rs. Lacs No. of equity shares in lacs EPS Rs./share PER, no. of times Dhara Ltd 56 10 5.60 12.50 Trupti Ltd 21 8.40 2.50 7.50

Determine premerger market value/share of each company and maximum exchange ratio Dhara Ltd can offer without dilution of its EPS and MV/share. Solution Dhara Pre-Merger Market Value per share Pre-Merger Market Value per share Desired Exchange Ratio Post-Merger PAT = 56 + 21 = 77 Lacs Desired Post-Merger EPS = 5.6 Post-Merger No. of shares = ? EPS = PAT/No. of shares 5.6 = 77/No. of Shares Post-Merger No. of Shares = 77/5.6 = 13.75 Lacs Existing Shares of Dhara = 10 Lacs New shares to be issued to Kohinoor Shareholders = 13.75 10 = 3.75 Lacs Existing Shares of Kohinoor = 8.40 Lacs Maximum Exchange Ratio without diluting EPS and MV = 3.75 Lacs/8.40 Lacs = 0.45 12.50 X 5.60 = 70 Trupti 7.50 X 2.50 = 18.75

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 18: EPS Management (VTU, MBA, Jan-2010, 10 Marks) Cadburys Ltd is considering acquisition of Bourneville Ltd. Following data are available for both: Particulars PAT Rs. No. of equity shares MV/share Rs. EPS Rs./share i) ii) Cadburys Ltd 200000 40000 15 5 Bourneville Ltd 60000 10000 12

If merger goes through by way of exchange of equity shares when exchange ratio is based on current market value of equity, what will be the new EPS for Cadburys Ltd? Bourneville Ltd wants to make sure that earnings available to its shareholders will not be diluted due to merger. What should be the exchange ratio in this case?

Solution Exchange Ratio = MV of Target Co/MV of Acquiring Co = 12/15 = 0.8 Post-Merger No. of shares = 40000 + (0.8 X 10000) = 48000 Post-Merger Profits = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = 5.42 Pre-Merger EPS of Bourneville Shareholders = 60000/10000 = Rs.6 Post-Merger EPS = Post-Merger PAT / Post-Merger No. of shares 6 = 260000 / (40000 + shares issued to Bourneville shareholders) Shares issued to Bourneville Ltd = (260000/6) 40000 = 3333 Exchange Ratio = 3333/10000 = 0.33

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 19: EPS Management (VTU, MBA, Jan-2010, 10 Marks) Sunfeast Ltd is considering a merger with Biskfarm Ltd. Shares of Sunfeast are currently traded at Rs. 25 each, has 2 lacs shares outstanding and a PAT of Rs. 4 lacs. Biskfarm has 1 lac shares outstanding, its current market value is Rs. 12.50 per share and PAT of Rs. 1 lac. Merger will be effected through a stock swap. Biskfarm has agreed to a plan where Sunfeast will offer current market value of Biskfarms shares. i) ii) iii) Solution Sunfeast Ltd Market Price Outstanding No of shares PAT Rs. i) Pre-Merger EPS Pre-Merger EPS Pre-Merger PER ii) PER = 8 times Current Market Price = PER X EPS = 8 X 1 = Rs.8 Sunfeast will pay Biskfarm its current market value of shares, which would be Rs.8 X 100000 = 800000 No. of shares to be issued = Rs.800000/Rs. 25 = 32000 Exchange Ratio = 32000/100000 = 0.32 Post-Merger EPS = (400000+100000)/(200000 X (0.32 * 100000)) = 500000/232000 = 2.15 iii) Pre-Merger EPS of Sunfeast = Rs. 2 Post-Merger EPS = Post-Merger PAT / Post-Merger No. of shares 2 = (400000+100000)/post-merger no of share Post-merger no of shares = 500000/2 = 250000 New shares to be issued to Biskfarm = 250000 existing shares of Sunfeast = 250000 200000 = 50000 Desired Exchange Ratio = 50000/100000 = 0.5 Rs. 25 200000 400000 =400000/200000 =Rs.2 =25/2 = 12.5 Biskfarm Ltd Rs.12.50 100000 100000 =100000/100000 =Re.1 =12.5/1 = 12.5 What are the pre-merger EPS and PER of both companies? If Biskfarms PER is 8 times, what is its current market price? What is the exchange ratio? What will be the post merger EPS of Sunfeast? What must be the exchange ratio for Sunfeast, so that its pre merger and post merger EPS will be the same?

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

10

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 20: EPS Management (VTU, MBA, Jan-2010, 15 Marks) Coke Ltd is considering purchase of Pepsi Ltd. Coke Ltd has 3 lac shares outstanding with a market price of Rs. 30 per share whereas Pepsi Ltd has 2 lacs shares outstanding each selling at Rs. 20 per share. EPS are Rs. 4 and Rs. 2.25 per share (Coke Ltd and Pepsi Ltd respectively). Managements of both companies are discussing two proposals for exchanging shares as (i) in proportion to relative EPS for these companies (ii) 0.5 Coke Ltd : 1 Pepsi Ltd (0.5:1). You are required to compute: (a) EPS, post-merger, both alternative (b) Share impact on EPS for shareholders of two companies under both alternatives Solution Alternative 1: ER in EPS proportion Exchange Ratio Pre-Merger Profit of Coke Ltd Pre-Merger Profit of Pepsi Ltd Post-Merger Profit Post-Merger No. of Shares Post-Merger EPS (Alt 1) Impact on EPS: Coke Ltd EPS before Merger EPS after Merger Impact (Alt 1) Alternative 2: ER at 0.5:1 Exchange Ratio Post-Merger Profit Post-Merger No. of Shares Post-Merger EPS (Alt 2) Impact on EPS: Coke Ltd EPS before Merger EPS after Merger Impact (Alt 2) 4 4.125 + 0.125 Increase in EPS Pepsi Ltd 2.25/.5 = 4.5 4.125 - 0.375 Decrease in EPS = 0.5 = Rs. 1650000 = 300000 + (200000 X 0.5) = 300000 + 100000 = 400000 = Rs.1650000/400000 = Rs. 4125 4 4 0 4 0 Pepsi Ltd 2.25/.5625 = 4 = EPS of Target Company / EPS of Acquiring Company = 2.25/4 = 0.5625 = No. of Shares X EPS = 300000 X Rs. 4 = Rs. 1200000 = 200000 X Rs. 2.25 = Rs. 450000 = 1200000 + 450000 = Rs. 1650000 = 300000 + (200000 X 0.5625) = 300000 + 112500 = 412500 = Rs.1650000/412500 = Rs.4

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

11

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 21: EPS Management Britannia Ltd is contemplating the purchase of Parle. Britannia has 200000 shares outstanding with Rs. 25 market value per share while Parle has 100000 shares selling at Rs. 18.75. The EPS are Rs. 3.125 for Britannia and Rs. 2.5 for Parle. Assuming that the two managements have agreed that the shareholders of Parle will receive Britannias shares in exchange for their shares: (i) (ii) In proportion to the relative earnings per share of the two firms or 0.9 share of Britannia for one share of Parle.

Find out the impact of merger on the EPS of merged firm. Also compute the EPS after merger on the assumption that the anticipated growth rate in earnings is 8% for Britannia and 14% for Parle. Solution Britannia Outstanding Shares Market Value per share EPS Profit 200000 25 3.125 3.125 X 200000 = 625000 Alternative 1 : Exchange Ratio based on EPS Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 2.5/3.125 = 0.8 Post-Merger No of shares = 200000 + (100000 X 0.8) = 200000 + 80000 = 280000 Post-Merger EPS = 875000/280000 = 3.125 Pre-Merger EPS of Britannia = 3.125 Impact of Merger on EPS (Alt 1)= 3.125 3.125 = 0 [No impact on EPS] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1.08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 280000 (as calculated above) Post-Merger EPS (Alt 1) = 960000/280000 = 3.43 Alternative 2 : Exchange Ratio 0.9
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

Parle 100000 18.75 2.5 2.5 X 100000 = 250000

12

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 0.9 Post-Merger No of shares = 200000 + (100000 X 0.9) = 200000 + 90000 = 290000 Post-Merger EPS = 875000/290000 = 3.017 Pre-Merger EPS of Britannia = 3.125 Impact of Merger on EPS (Alt 2) = 3.017 3.125 = -0.11 [EPS diluted by Re. 0.11] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1.08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 290000 (as calculated above) Post-Merger EPS (Alt 2) = 960000/290000 = 3.31

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

13

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 22: EPS Management (CS, Final, Dec-1995) Curry Ltd. Si considering takeover of Top Ramen Ltd and Foodles Ltd. The financial data for the three companies are as follows: Curry Equity Share Capital of Rs. 10 each (Rs. Lacs) Earnings (Rs. Lacs) Market Price of each share (Rs.) 450 90 60 Top Ramen 180 18 37 Foodles 90 18 46

Calculate (i) P/E Ratio (ii) EPS of Curry Ltd, after the acquisition of Top Ramen and Foodles separately. The exchange ratio would be based on the P/E Ratio. Will you recommend the Merger of either/both of the companies? Justify your answer. Solution (i) Calculation of PER Curry Earnings No. of shares EPS Market Price P/E Ratio (ii) Calculation of Post-Merger EPS Takeover of Top Ramen Exchange Ratio Post-Merger Earnings Post-Merger Number of Shares Post-Merger EPS 30/37 = 0.81 90+18 = 108 45 + (0.81 X 18) = 59.58 108/59.58 = 1.81 Takeover of Foodles 30/23 = 1.30 90+18 = 108 45 + (1.3 X 9) = 56.7 108/56.7 = 1.90 90 45 2 60 60/2 = 30 Top Ramen 18 18 1 37 37/1 = 37 Foodles 18 9 2 46 46/2 = 23

Neither of the Takeovers is recommended to Curry, as the post-merger EPS of either 1.81 or 1.9 is lower than Pre-Merger EPS of Curry, which is 2

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

14

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 23: EPS Management (CS, Final, Dec-2000) Bread Co. is studying the possible acquisition of Bun Co. by way of a merger. The following data are available in respect of the companies. Bread Co. Earnings after Tax Rs. No. of Equity shares (i) (ii) 200000 40000 Bun Co. 60000 10000 12

Market Value per Share Rs. 15

If the merger goes through exchange of equity shares and exchange ratio is based on the current market price, what is new EPS for Bread Co? Bun Co. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. What should be the exchange ratio in that case?

Solution Exchange Ratio = 12/15 = 0.8:1 Post-Merger No. of shares = 40000 + (0.8 X 10000) = 40000 + 8000 = 48000 Post-Merger PAT = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = Rs. 5.42 EPS = Profit after Tax / No. of shares 6 = 260000 / No. of shares Solving for No. of shares, No. of Shares of Post-Merger Company = 43333 Existing shares of Bread Ltd = 40000 Additional Shares to be issued = 3333 Existing Shares of Bun Ltd = 10000 Shares to be offered at the ratio 3333/10000 = 0.33

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

15

Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 24: EPS Management More Ltd., is studying the possible acquisition of Easyday. Ltd., by way of merger. The following data are available in respect of the companies: Particulars Earnings after tax (Rs.) No. of equity shares More Ltd. 80,00,000 16,00,000 Easyday Ltd. 24,00,000 4,00,000 160

Market value per share (Rs.) 200

(i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price, what is the new earning per share for More Ltd.? (ii) Easyday Ltd. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. What should be the exchange ratio in that case? Solution (i) Calculation of new EPS of More Ltd. No. of shares to be issued to Easyday = 4,00,000 shares (Rs. 1.6/Rs. 2) = 3,20,000 shares Post-Merger No of shares = 16,00,000 + 3,20,000 = 19,20,000 Post-Merger Profits = 80,00,000 + 24,00,000 = 1,04,00,000 Post-Merger EPS = Rs.1,04,00,000/19,20,000 = Rs. 5.42 (ii) Desired Exchange Ratio Current EPS: More Ltd. = Rs.80,00,000/16,00,000 = Rs. 5 Easyday Ltd. = Rs.24,00,000/4,00,000 = Rs. 6 Exchange ratio = 6/5 = 1.20 No. of new shares to be issued to Easyday = 4,00,000 1.20 = 4,80,000 Post-Merger No. of Shares = 16,00,000 + 4,80,000 = 20,80,000 Post-Merger EPS = Rs.1,04,00,000/20,80,000 = Rs. 5 Total earnings in M Co. Ltd. available to new shareholders of N Co. Ltd. = 4,80,000 Rs. 5 = Rs. 24,00,000 Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to shareholders of 'N' Co. Ltd.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 25: EPS Management Horlicks Ltd., is considering merger with Complan Ltd. Horlicks Ltd.s shares are currently traded at Rs. 20. It has 2,50,000 shares outstanding and its earnings after taxes (EAT) amount to Rs. 5,00,000. Complan Ltd., has 1,25,000 shares outstanding; its current market price is Rs. 10 and its EAT are Rs. 1,25,000. The merger will be effected by means of a stock swap (exchange). Complan Ltd., has agreed to a plan under which Horlicks Ltd., will offer the current market value of Complan Ltd.s shares: i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies? ratio? What will Horlicks Ltd.s post-merger EPS be? iii) What should be the exchange ratio, if Horlicks Ltd.s pre-merger and post-merger EPS are to be the same? Solution (i) Pre-merger EPS and P/E ratios of Horlicks Ltd. and Complan Ltd. Particulars Earnings after taxes Number of shares outstanding Pre-Merger EPS Market Price per share P/E Ratio (times) Horlicks Ltd. 5,00,000 2,50,000 2 20 10 Complan Ltd. 1,25,000 1,25,000 1 10 10 ii) If Complan Ltd.s P/E ratio is 6.4, what is its current market price? What is the exchange

(ii) Current Market Price of Complan Ltd. if P/E ratio is 6.4 = Rs. 1 6.4 = Rs. 6.40 Exchange ratio = Rs.20/6.40 = 3.125 Post merger EPS = (Rs.5,00,000 + Rs.1,25,000)/[Rs.2,50,000 + (Rs.1,25,000/3.125)] = Rs.6,25,000/Rs.2,90,000 = 2.16 (iii) Desired exchange ratio Total number of shares in post-merged company = Post -merger earnings / Pre -merger EPS of XYZ Ltd = Rs.6,25,000 / 2 = 3,12,500 Number of shares required to be issued = 3,12,500 2,50,000 = 62,500 Therefore, the exchange ratio is = 62,500/1,25,000 = 0.50

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 26: EPS Management Gemini Industries Ltd. (GIL) is considering a takeover of Sunrich Industries Ltd. (SIL). The particulars of two companies are given below: Particulars Earnings After Tax (EAT) Equity shares O/s Earnings per share (EPS) PE Ratio (Times) Required: (i) What is the market value of each Company before merger? (ii) Assume that the management of RIL estimates that the shareholders of SIL will accept an offer of one share of RIL for four shares of SIL. If there are no synergic effects, what is the market value of the Post-merger RIL? What is the new price per share? Are the shareholders of RIL better or worse off than they were before the merger? (iii) Due to synergic effects, the management of RIL estimates that the earnings will increase by 20%. What is the new post-merger EPS and Price per share? Will the shareholders be better off or worse off than before the merger? Solution (i) Market value of Companies before Merger RIL EPS P/E Ratio Market Price Per Share Equity Shares Pre-Merger Market Value 2 10 20 10,00,000 =1000000 X 20 = 2,00,00,000 (ii) Post Merger Effects on RIL Post merger earnings Exchange Ratio No. of equity shares o/s Post-Merger EPS PER Post-Merger Market Value Gains From Merger: Rs. Post-Merger Market Value of the Firm Less: Pre-Merger Market Value
KIRAN KUMAR, Asst. Professor, VVCE, Mysore

RIL Rs.20,00,000 10,00,000 2 10

SIL Rs.10,00,000 10,00,000 1 5

SIL 1 5 5 10,00,000 =1000000 X 5 = 50,00,000

(2 X 1000000) + (1 X 1000000) =30,00,000 (1:4) or 0.25 (10,00,000 + (0.25 X 1000000)) = 12,50,000 30,00,000/12,50,000 = 2.4 10.00 (12,50,000 x 24) = 3,00,00,000 3,00,00,000

Post-Merger Market Price per share 10 x 2.4 = 24

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

RIL 2,00,00,000 SIL 50,00,000 Total gains from Merger Particulars Post Merger Market Value: 10,00,000 x 24 2,50,000 x 24 Less:Pre-Merger Market Value Gains from Merger: (iii) Post-Merger Earnings: Increase in Earnings by 20% New Earnings: Rs.30,00,000 x 20% = Rs.36,00,000 No. of equity shares outstanding: 12,50,000 Post-Merger EPS: Rs. 36,00,000/12,50,000 = Rs.2.88 PE Ratio = 10 Post-Merger Market Price Per Share = Rs.2.88 x 10 = Rs.28.80 So, Shareholders will be better-off than before the merger situation. 2,50,00,000 50,00,000 RIL Rs. 2,40,00,000 -2,00,00,000 40,00,000 SIL Rs. -60,00,000 50,00,000 10,00,000

Apportionment of Gains between the Shareholders:

Thus, the shareholders of both the companies (RIL + SIL) are better off than before

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 27: Market Value of Merged Firm (VTU, MBA, Jul-2011, 10 Marks)(Figures Changed) The following information is provided related to the acquiring Firm Regaalis Limited and the target Firm Metropole Limited: Regaalis Limited Earnings after tax (Rs.) Number of shares outstanding P/E ratio (times) Required: (i) What is the Swap Ratio based on current market prices? (ii) What is the EPS of Regaalis Limited after acquisition? (iii) What is the expected market price per share of Regaalis Limited after acquisition, assuming P/E ratio of Regaalis Limited remains unchanged? (iv) Determine the market value of the merged firm. (v) Calculate gain/loss for shareholders of the two independent companies after acquisition. Solution Regaalis Ltd. EPS Market Price Rs. 2,000 Lakhs/ 200 lakhs = Rs. 10 Rs. 10 X 10 = Rs. 100 Metropole Ltd. Rs. 400 lakhs / 100 lakhs = Rs. 4 Rs. 4 X 5 = Rs. 20 2,000 lakhs 200 lakhs 10 Metropole Limited 400 lakhs 100 lakhs 5

(i) The Swap ratio based on current market price = Rs. 20/Rs. 100 = 0.2 No. of shares to be issued = Rs. 100 lakh X 0.2 = Rs. 20 lakhs. (ii) EPS after merger = (Rs.2,000 lakhs + Rs. 400 lakhs)/(200 lakhs + 20 lakhs) = Rs. 10.91 (iii) Expected market price after merger assuming P / E 10 times = Rs. 10.91 X 10 = Rs. 109.10 (iv) Market value of merged firm = Rs. 109.10 market price X 220 lakhs shares = 240.02 crores (v) Gain from the merger Post merger market value of the merged firm Rs. 240.02 crores Less: Pre-merger market value Regaalis Ltd. 200 Lakhs X Rs. 100 = 200 crores Metropole Ltd. 100 Lakhs X Rs. 20 = 20 crores Rs. 220 crores Gain from merger Rs. 20.02 crores Appropriation of gains from the merger among shareholders: Regaalis Ltd. Post merger value Less: Pre-merger market value Gain to Shareholders 218.20 crores 200.00 crores 18.20 crores Metropole Ltd. 21.82 crores 20.00 crores 1.82 crores

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 28: Market Value of Merged Firm (VTU, MBA, Jul-2011, 10 Marks) Pillsbury Ltd wants to acquire Ashirvad Ltd, by exchanging its 1.6 shares for every share of Ashirvad Ltd. It anticipates to maintain the existing P/E Ratio subsequent to the merger also. The relevant financial data are furnished below: Particulars Earnings After Tax (Rs.) Number of equity shares outstanding Market Price per Share (Rs.) i) ii) iii) iv) v) Pillsbury Ltd 1500000 300000 35 Ashirvad Ltd 450000 75000 40

What is the exchange ratio based on market price? What is pre-merger EPS and P/E ratio for each company? What is the P/E ratio used in acquiring Ashirvad Ltd? What will be EPS of Pillsbury Ltd after the acquisition? What is the expected market price per share of the merged company?

Solution i) Exchange Ratio based on MP =(1.6 X 35)/40 = 1.4 ii) Pre-Merger EPS and P/E Ratio Pillsbury Ltd Pre-Merger EPS P/E Ratio iii) Implied P/E Ratio 1500000/300000 = 5 35/5 = 7 = (1.6 X 35) / 6 = 9.33 iv) EPS of Pillsbury after acquisition Number of shares after merger = 300000 + (75000 X 1.6) = 420000 Total Profit of Merged Company = 1500000 + 450000 = 1950000 EPS post-merger = 1950000 / 420000 = 4.64 v) Post-Merger Market Price = P/E ratio X EPS = 7 X 4.64 = 32.48 Ashirvad Ltd 450000/75000 = 6 40/6 = 6.67

= Market price of shares offered/Current EPS

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 29: Market Value of Merged Firm (VTU, MBA, Jul-2009, 7 Marks) Sunpure Ltd is taking over Saffola Ltd. The shareholders of Saffola Ltd would receive 0.8 of Sunpure Ltd for each share held by them. The relevant data for two companies are as below: Sunpure Ltd Net Sales (Rs. In crores) Profit after Tax (Rs. In Crores) No. of shares (Crore) EPS (Rs.) Market Value per Share (Rs.) Price Earnings Ratio 335 58 12 4.83 30 6.21 Saffola Ltd 118 12 3 4 20 5

For the combined company (after merger) you are required to calculate (i) EPS (ii) P/E Ratio (iii) market value per share (iv) number of shares (v) Total Market Capitalization Solution i) Post-Merger EPS Post-Merger Profit = 58 + 12 = Rs. 70 Crores Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore Post-Merger EPS = 70 / 14.4 = Rs. 4.86 ii) Post-Merger or Implied P/E Ratio Post-Merger EPS = 70 / 14.4 = Rs. 4.86 Implied P/E Ratio = 30 X 0.8 / 4 = 6 iii) Post-Merger Market Value per Share P = 6 X 4.86 = Rs. 24 iv) Post-Merger number of shares Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore v) Post-Merger Total Market Capitalization TMC = Rs. 14.4 Crores X Rs. 24 = Rs. 345.6 Crores

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 30: Market Value of Merged Firm (VTU, MBA, Jul-2009, 10 Marks) MTR Company is acquiring Ruchi Company. MTR will pay 0.5 of its shares to the shareholders of Ruchi for each share held by them. The data for two companies are as below: Particulars Profit after Tax (Rs. In lacs) No. of shares (in lacs) EPS (Rs.) Market Price per Share (Rs.) P/E Ratio MTR 150 25 6 78 13 Ruchi 30 8 3.75 33.75 9

Calculate the earnings per share of the surviving firm after merger. If the P/E ratio falls to 12 after the merger, what is the premium received by the shareholders of Ruchi (using the surviving firms new price)? Is the merger beneficial for MTR shareholders? Solution Post-Merger EPS of MTR Post-Merger Profit = 150 + 30 = Rs. 180 Lacs Post-Merger No. of shares = 25 + (0.5 X 8) = 25 + 4 = 29 Lacs Post-Merger EPS = 180 / 29 = Rs. 6.21 If P/E Ratio falls to 12 after Merger, Post-Merger market price of MTR shares = 12 X 6.21 = Rs. 74.48 Gain Apportionment among shareholders Post-Merger Value MTR Ltd Ruchi Ltd 25 X 74.48 = 1862 Lacs 4 X 74.48 = 297.92 Lacs Pre-Merger Value 25 X Rs. 78 = 1950 Lacs 8 X 33.75 = 270 Lacs Difference Minus 88 Lacs 27.92 Lacs

Therefore, if P/E falls to 12 after Merger, Ruchi Ltds shareholders receive a premium of Rs. 27.92 lacs (Or Rs.3.49 per share of Ruchi Ltd they held before merger) If P/E falls to 12 after Merger, Merger is not beneficial to MTR Ltd, as the gain to shareholders is negative 88 Lacs.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 31: Market Value of Merged Firm (VTU, MBA, Jan-2010, 12 Marks) Everest Ltd and Maharaja Ltd provide the following financial data: Everest Ltd EAT (Rs. In lakhs) Net Sales (Rs. In lakhs) Number of shares EPS Rs. DPS Rs. Market Capitalization (Rs. Lakh) Everest Ltd planned to acquire Maharaja Ltd. Required: i) ii) Calculate pre-merger market value per share for both the companies Calculate post-merger EPS, market value per share and price earnings ratio if shareholders of Maharaja Ltd are offered a share of Rs. 60 for Rs. 40 in a share exchange for merger Solution i) Pre-Merger Market Price Everest Market Capitalization Number of Shares Market Price Exchange Ratio = 3:2 Post-Merger Profit = 25 +3 = 28 Lacs Post-Merger Number of shares = 8 + (3 X 1.5) = 8 + 4.5 = 12.5 Lacs Post-Merger EPS = 28 / 12.5 = Rs. 2.24 Post-Merger Market Price = 2.24 X 20.83 = 46.66 Post-Merger P/E = 46.66/2.24 = 20.83 500 8 500/8 = Rs. 62.5 Maharaja 60 3 60/3 = Rs. 20 25 400 800000 3 2 500 Maharaja Ltd 3 60 300000 1 1 60

ii) Calculation of Post-Merger EPS, MP, P/E

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 32: Market Value of Merged Firm (VTU, MBA, Dec-2011, 10 Marks) The following data concerns Prestige Ltd and Pigeon Ltd: Prestige Ltd Pigeon Ltd

Earnings after taxes Rs. 160000 Rs. 40000 Equity shares outstanding 16000 5000 Market Price per share Rs. 75 Rs. 50 Prestige Ltd acquires Pigeon Ltd by exchanging one share for every two shares of Pigeon Ltd. Assume that Prestige Ltd expects to have same earnings and P/E ratios after the merger as before (no synergy). Show extent of gain accruing to the shareholders of two companies as a result of merger. Apportion the gain among shareholders and comment. Solution Prestige Pigeon Pre-Merger EPS 160000/16000 = 10 40000/5000 = 8 Pre-Merger PER 75/10 = 7.5 50/8 = 6.25 Pre-Merger Market Value of Firm 75 X 16000 = 1200000 50 X 5000 = 250000 Post-Merger EAT 160000+40000 = 200000 Exchange Ratio 1/2 = 0.5 Post-Merger No. of Shares 16000 + (0.5 X 5000) = 16000 + 2500 = 18500 Post-Merger EPS 200000/18500 = 10.81 Post-Merger P/E Ratio 7.5 Post-Merger Market Price per Share 7.5 X 10.81 = 81.075 Total Value (18500 x 81.075) = 1499887 Gains From Merger: Post-Merger Market Value of the Firm 1499887 Less: Pre-Merger Market Value Prestige 1200000 Pigeon 250000 1450000 Total gains from Merger 49887 Apportionment of Gains between the Shareholders: Particulars Prestige Pigeon Post Merger Market Value: 16000 x 81.075 1297200 -2500 x 81.075 -202687 Less:Pre-Merger Market Value 1200000 250000 Gains from Merger: 97200 - 47313 Thus, the shareholders of Prestige Ltd (Acquiring Co) are better off by this Merger, as they gain Rs. 97200 from this Merger. Whereas, shareholders of Pigeon Ltd (Target Co) are worse off from this Merger, as they are losing Rs. 47313 from their market value because of this Merger.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring

Problems and Solutions on Exchange Ratio

Exercise 33: Market Value of Merged Firm Mango Ltd. wants to acquire Apple Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of Apple Ltd.). Following information is provided: Mango Ltd. Profit after tax Equity shares outstanding (Nos.) EPS PE Ratio Market price per share Required: (i) The number of equity shares to be issued by Mango Ltd. for acquisition of Apple Ltd. (ii) What is the EPS of Mango Ltd. after the acquisition? (iii) Determine the equivalent earnings per share of Apple Ltd. (iv) What is the expected market price per share of Mango Ltd. after the acquisition, assuming its PE multiple remains unchanged? (v) Determine the market value of the merged firm. Solution (i) The number of shares to be issued by Mango Ltd.: The Exchange ratio is 0.5 So, new Shares = 1,80,000 x .5 = 90,000 shares. (ii) EPS of Mango Ltd. After acquisition: Total Earnings = (18,00,000+3,60,000) = Rs.21,60,000 No. of Shares = (6,00,000 + 90,000) = 6,90,000 Post-Merger EPS = (21,60,000)/6,90,000) = Rs.3.13 (iii) Equivalent EPS of Apple Ltd.: No. of new Shares for every one share 0.5 EPS Rs.3.13 Equivalent EPS = (3.13 x .5) = Rs.1.57 (iv) New Market Price of Mango Ltd. (P/E Remaining unchanged): Present P/E Ratio of Mango Ltd. 10 times Expected EPS after merger Rs.3.13 Post-Merger Market Price = (3.13 x 10) = Rs.31.30 (v) Market Value of merged firm: Total number of Shares 6,90,000 Expected Market Price Rs.31.30 Total value = (6,90,000 x 31.30) = Rs.2,15,97,000 Rs.18,00,000 6,00,000 Rs.3 10 times Rs.30 Rs.14 Apple Ltd. Rs.3,60,000 1,80,000 Rs.2 7 times

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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