exchange ratio - problems n solutions

Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

1

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


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



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


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: Rice Ltd – 1000 Wheat Ltd – 400

Solution:

New shares to be issued to Wheat = 0.5 X 400 = 200

Existing Shares of Rice = 1000




2


Based on the information given below ascertain the exchange ratio based on Net Assets Value:

Slice Ltd (Acquirer) Maaza Ltd (Target)

Total Assets 1000 Lacs 500 Lacs

External Liabilities 400 Lacs 200 Lacs

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 = Net Assets of Target Co./Net Assets of Acquiring Co.

= 300/600 = 0.5

Exchange Ratio = 0.5:1

i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd


Based on the information given below determine the exchange ratio based on Net Assets Value:

Torino Ltd (Acquirer) Citra Ltd (Target)

Fixed Assets 150 100

Current Assets 100 50

13% Debentures 100 40

Creditors 100 10

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 = Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2

Exchange Ratio = 2:1

i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd


Determine the exchange ratio in case of below Merger, based on EPS proportion:

Fanta Ltd(Acquirer) Sprite Ltd(Target)

EPS Rs. 100 Rs.50

Solution

Exchange Ratio based on EPS proportion = EPS of Target Co / EPS of Acquiring Co

Exchange Ratio based on EPS proportion = 50 / 100 = 0.5

Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite



3


Determine the exchange ratio in case of below Merger, based on EPS proportion:

Thumsup Ltd(Acquirer) Mountaindew Ltd(Target)

PAT Rs. 6700000 Rs. 5450000

No. of shares 100000 50000

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


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


Determine the Exchange Ratio in case of below takeover based on Market price

Dosa Ltd(Acquirer) Idli Ltd(Target)

P/E Ratio 5 Times 10 Times

Profit after Tax Rs. 20 Lacs Rs. 1250000

No. of Shares 100000 50000

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



4

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


Net Current Assets 51000 26000

Maintainable Annual Profit After Tax

For Equity Shareholders

24000 15000

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) Market Price?

Which method would you prefer from Shanthisagar Ltd’s point of view?

Solution

i) Exchange Ratio based on Net Assets Value

Shanthisagar Maheshprasad


Net Current Assets 51000 26000

Total Assets 173000 61000

Less: 10% Debentures 15000 5000

Less: Preference Shares 20000

Net Assets 138000 56000

No. of Shares 10000 5000

Net Assets per share 13.8 11.2

Exchange Ratio based on Net Assets = 11.2/13.8 = 0.81

ii) Exchange Ratio based on EPS

Profit 24000 15000

No. of Shares 10000 5000

Earnings per share 2.4 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



5

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 Nandini Ltd Heritage Ltd

Present Earnings (in thousands) Rs. 4000 Rs. 1000

Common Shares (in thousands) 2000 800

Earnings Per Share Rs. 2 Rs. 1.25

Price/Earnings Ratio 12 8

Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd.

i) What is the ratio of exchange of stock?

ii) How many new shares will be issued?

Solution

Nandini Heritage

No. of shares (using EPS) 2000 800

Finding out Market Price through P/E ratio formula

P/E Ratio = Market Price / EPS 12 = x/2 8 = x/1.25

Solving for x, we get Market Price as 24 10

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



6


Based on the below data, calculate Pre-Merger EPS for both companies and Post-Merger EPS of

Acquiring Company

Kohinoor Ltd(Acquirer) IndiaGates Ltd(Target)

Exchange Ratio 2:1

PAT Rs. 1000 Lacs Rs. 800 Lacs

Share Capital Rs. 5 Crores (Par Value Rs. 10 Each) Rs. 1 Crore (Par Value Re. 2

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 Maggi Ltd Knorr Ltd

No. of Equity Shares 500000 300000

Earnings after Tax Rs. 2500000 Rs. 900000

Market Value per Share Rs. 21 Rs. 14

i) What is the present EPS of both companies?

ii) 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 Knorr

PAT 2500000 900000

No. of shares 500000 300000

EPS 5 3



7

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


Sankranthi Ltd. is intending to acquire Deepavali Ltd. by merger and the following information

is available in respect of the companies:

Sankranthi Ltd. Deepavali Ltd.

Number of equity shares 10,00,000 6,00,000

Earnings after tax (Rs.) 50,00,000 18,00,000

Market value per share (Rs.) 42 28

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 limited’s 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



8

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 Dhara Ltd Trupti Ltd

PAT Rs. Lacs 56 21

No. of equity shares in lacs 10 8.40

EPS Rs./share 5.60 2.50

PER, no. of times 12.50 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 Trupti

Pre-Merger Market Value per share 12.50 X 5.60 7.50 X 2.50

Pre-Merger Market Value per share = 70 = 18.75

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



9


Cadburys Ltd is considering acquisition of Bourneville Ltd. Following data are available for

both:

Particulars Cadburys Ltd Bourneville Ltd

PAT Rs. 200000 60000

No. of equity shares 40000 10000

MV/share Rs. 15 12

EPS Rs./share 5

i) 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?

ii) 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



10


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 Biskfarm’s shares.

i) What are the pre-merger EPS and PER of both companies?

ii) If Biskfarm’s PER is 8 times, what is its current market price? What is the exchange

ratio? What will be the post merger EPS of Sunfeast?

iii) What must be the exchange ratio for Sunfeast, so that its pre merger and post

merger EPS will be the same?

Solution

Sunfeast Ltd Biskfarm Ltd

Market Price Rs. 25 Rs.12.50

Outstanding No of shares 200000 100000

PAT Rs. 400000 100000

i) Pre-Merger EPS =400000/200000 =100000/100000

Pre-Merger EPS =Rs.2 =Re.1

Pre-Merger PER =25/2 = 12.5 =12.5/1 = 12.5

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



11


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 = EPS of Target Company / EPS of Acquiring Company

= 2.25/4 = 0.5625

Pre-Merger Profit of Coke Ltd = No. of Shares X EPS

= 300000 X Rs. 4 = Rs. 1200000

Pre-Merger Profit of Pepsi Ltd = 200000 X Rs. 2.25 = Rs. 450000

Post-Merger Profit = 1200000 + 450000 = Rs. 1650000

Post-Merger No. of Shares = 300000 + (200000 X 0.5625)

= 300000 + 112500 = 412500

Post-Merger EPS (Alt 1) = Rs.1650000/412500 = Rs.4

Impact on EPS:

Coke Ltd Pepsi Ltd

EPS before Merger 4 2.25/.5625 = 4

EPS after Merger 4 4

Impact (Alt 1) 0 0

Alternative 2: ER at 0.5:1

Exchange Ratio = 0.5

Post-Merger Profit = Rs. 1650000

Post-Merger No. of Shares = 300000 + (200000 X 0.5) = 300000 + 100000 = 400000

Post-Merger EPS (Alt 2) = Rs.1650000/400000 = Rs. 4125

Impact on EPS:

Coke Ltd Pepsi Ltd

EPS before Merger 4 2.25/.5 = 4.5

EPS after Merger 4.125 4.125

Impact (Alt 2) + 0.125 - 0.375

Increase in EPS Decrease in EPS



12


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 Britannia’s shares in

exchange for their shares:

(i) In proportion to the relative earnings per share of the two firms or

(ii) 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 Parle

Outstanding Shares 200000 100000

Market Value per share 25 18.75

EPS 3.125 2.5

Profit 3.125 X 200000 2.5 X 100000

= 625000 = 250000

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 No of shares = 280000 (as calculated above)

Post-Merger EPS (Alt 1) = 960000/280000 = 3.43

Alternative 2 : Exchange Ratio 0.9



13


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 No of shares = 290000 (as calculated above)

Post-Merger EPS (Alt 2) = 960000/290000 = 3.31



14

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 Top Ramen Foodles

Equity Share Capital of Rs. 10 each (Rs. Lacs) 450 180 90

Earnings (Rs. Lacs) 90 18 18

Market Price of each share (Rs.) 60 37 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 Top Ramen Foodles

Earnings 90 18 18

No. of shares 45 18 9

EPS 2 1 2

Market Price 60 37 46

P/E Ratio 60/2 = 30 37/1 = 37 46/2 = 23

(ii) Calculation of Post-Merger EPS

Takeover of Top Ramen Takeover of Foodles

Exchange Ratio 30/37 = 0.81 30/23 = 1.30

Post-Merger Earnings 90+18 = 108 90+18 = 108

Post-Merger Number of Shares 45 + (0.81 X 18) = 59.58 45 + (1.3 X 9) = 56.7

Post-Merger EPS 108/59.58 = 1.81 108/56.7 = 1.90

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



15

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. Bun Co.

Earnings after Tax Rs. 200000 60000

No. of Equity shares 40000 10000

Market Value per Share Rs. 15 12

(i) 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?

(ii) 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



16


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 More Ltd. Easyday Ltd.

Earnings after tax (Rs.) 80,00,000 24,00,000

No. of equity shares 16,00,000 4,00,000

Market value per share (Rs.) 200 160

(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.



17


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?

ii) If Complan Ltd.’s P/E ratio is 6.4, what is its current market price? What is the exchange

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 Horlicks Ltd. Complan Ltd.

Earnings after taxes 5,00,000 1,25,000

Number of shares outstanding 2,50,000 1,25,000

Pre-Merger EPS 2 1

Market Price per share 20 10

P/E Ratio (times) 10 10

(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



18


Gemini Industries Ltd. (GIL) is considering a takeover of Sunrich Industries Ltd. (SIL). The

particulars of two companies are given below:

Particulars RIL SIL

Earnings After Tax (EAT) Rs.20,00,000 Rs.10,00,000

Equity shares O/s 10,00,000 10,00,000

Earnings per share (EPS) 2 1

PE Ratio (Times) 10 5

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 SIL

EPS 2 1

P/E Ratio 10 5

Market Price Per Share 20 5

Equity Shares 10,00,000 10,00,000

Pre-Merger Market Value =1000000 X 20 =1000000 X 5

= 2,00,00,000 = 50,00,000

(ii) Post Merger Effects on RIL

Post merger earnings (2 X 1000000) + (1 X 1000000) =30,00,000

Exchange Ratio (1:4) or 0.25

No. of equity shares o/s (10,00,000 + (0.25 X 1000000)) = 12,50,000

Post-Merger EPS 30,00,000/12,50,000 = 2.4

PER 10.00

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

Post-Merger Market Value (12,50,000 x 24) = 3,00,00,000

Gains From Merger: Rs.

Post-Merger Market Value of the Firm 3,00,00,000

Less: Pre-Merger Market Value



19

RIL 2,00,00,000

SIL 50,00,000 2,50,00,000

Total gains from Merger 50,00,000

Apportionment of Gains between the Shareholders:

Particulars RIL SIL

Post Merger Market Value: Rs. Rs.

10,00,000 x 24 2,40,00,000 --

2,50,000 x 24 -- 60,00,000

Less:Pre-Merger Market Value 2,00,00,000 50,00,000

Gains from Merger: 40,00,000 10,00,000

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

(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.



20

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 Metropole Limited

Earnings after tax (Rs.) 2,000 lakhs 400 lakhs

Number of shares outstanding 200 lakhs 100 lakhs

P/E ratio (times) 10 5

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. Metropole Ltd.

EPS Rs. 2,000 Lakhs/ 200 lakhs Rs. 400 lakhs / 100 lakhs

= Rs. 10 = Rs. 4

Market Price Rs. 10 X 10 = Rs. 100 Rs. 4 X 5 = Rs. 20

(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. Metropole Ltd.

Post merger value 218.20 crores 21.82 crores

Less: Pre-merger market value 200.00 crores 20.00 crores

Gain to Shareholders 18.20 crores 1.82 crores



21

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 Pillsbury Ltd Ashirvad Ltd

Earnings After Tax (Rs.) 1500000 450000

Number of equity shares outstanding 300000 75000

Market Price per Share (Rs.) 35 40

i) What is the exchange ratio based on market price?

ii) What is pre-merger EPS and P/E ratio for each company?

iii) What is the P/E ratio used in acquiring Ashirvad Ltd?

iv) What will be EPS of Pillsbury Ltd after the acquisition?

v) 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 Ashirvad Ltd

Pre-Merger EPS 1500000/300000 = 5 450000/75000 = 6

P/E Ratio 35/5 = 7 40/6 = 6.67

iii) Implied P/E Ratio = Market price of shares offered/Current EPS

= (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



22


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 Saffola Ltd

Net Sales (Rs. In crores) 335 118

Profit after Tax (Rs. In Crores) 58 12

No. of shares (Crore) 12 3

EPS (Rs.) 4.83 4

Market Value per Share (Rs.) 30 20

Price Earnings Ratio 6.21 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


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



23


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 MTR Ruchi

Profit after Tax (Rs. In lacs) 150 30

No. of shares (in lacs) 25 8

EPS (Rs.) 6 3.75

Market Price per Share (Rs.) 78 33.75

P/E Ratio 13 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 firm’s 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 Pre-Merger Value Difference

MTR Ltd 25 X 74.48 = 1862 Lacs 25 X Rs. 78 = 1950 Lacs Minus 88 Lacs

Ruchi Ltd 4 X 74.48 = 297.92 Lacs 8 X 33.75 = 270 Lacs 27.92 Lacs

Therefore, if P/E falls to 12 after Merger, Ruchi Ltd’s 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.



24

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 Maharaja Ltd

EAT (Rs. In lakhs) 25 3

Net Sales (Rs. In lakhs) 400 60

Number of shares 800000 300000

EPS Rs. 3 1

DPS Rs. 2 1

Market Capitalization (Rs. Lakh) 500 60

Everest Ltd planned to acquire Maharaja Ltd.

Required:

i) Calculate pre-merger market value per share for both the companies

ii) 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 Maharaja

Market Capitalization 500 60

Number of Shares 8 3

Market Price 500/8 = Rs. 62.5 60/3 = Rs. 20

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

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 Market Price = 2.24 X 20.83 = 46.66

Post-Merger P/E = 46.66/2.24 = 20.83



25

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.



26

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. Apple Ltd.

Profit after tax Rs.18,00,000 Rs.3,60,000

Equity shares outstanding (Nos.) 6,00,000 1,80,000

EPS Rs.3 Rs.2

PE Ratio 10 times 7 times

Market price per share Rs.30 Rs.14

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

exchange ratio - problems n solutions

Documents