Purpose/Objective acquire a BPO company which would provide strategic synergy fit

Calculation of Purchase Consideration

Amount
Working (Rs in
Notes Particulars Crores)
Shares of ACQ issued to Target Pvt Ltd
(TPL)
1.5 shares of ACQ for 1 share of TPL issued
WN 1 at Rs 27/share 90 2,430
WN 2 11% debentures -
External Liabilities 225
Unaccounted Liabilities 30

Dissolution expenses 22.5

Total Purchase Consideration to be paid 2,708

Computation of Value of firm and Equity

(Free Cash Flow to Firm/ FCFF Method)

Present
Cash Flow PVIF @ Value (Rs
Year end (Rs in Crores) 13% in Crores)
1 225 0.8850 199.12
2 300 0.7831 234.94
3 390 0.6931 270.29
4 450 0.6133 275.99
5 330 0.5428 179.11
6 180 0.4803 86.46
Terminal Value 1,854.00 0.4803 890.51
Total Present Value of all FCFF 2,136.42
Less: Cost of Acquisition 2,708
Net Present Value -571.08

Financially this deal is not viable/feasible as the net present value of the is negative
ACQ is paying Target Pvt ltd Rs 2,708 cr which higher than its value of firm of Rs 2,136.42 Cr
There is information assymetry where ACQ ltd might have other info which would provide synergy and profit by
Since the objective is to find a company which would provide strategic synergy on acquisition, ACQ must analys
like market power, Human resources, technology and information system etc.,

Additionally this would help add to the topline sales of Rs 3,750 crores, profit and cash flow of ACQ even though
which would provide strategic synergy fit

Working Note 1:

Assumption
Face Value of 1 share is Rs 10
for both the companies Target Pvt Ltd

No of Shares 60 Crore

Working Note 2:

There are no lenders of loan

funds in the balance sheet of
Target Pvt Ltd

Long term liabilities are

considered as external liabilities
and setteled at Rs 225 Crores

Working Note 3:
Discounting rate is the Cost of Capital 13%
Terminal Value formula = cash flow of year 6 * (1+ perpetual growth rate)/(cost of capital - growth rate)

the is negative
f firm of Rs 2,136.42 Cr
which would provide synergy and profit by taking over to its own business which would offset the poor cash flow from target pvt ltd
ic synergy on acquisition, ACQ must analyse from non-financial parameters to assess the feasibility of the deal

es, profit and cash flow of ACQ even though NPV is negative
growth rate)

r cash flow from target pvt ltd

Q2
Crown Jewels represent the precious assets attract the raider to bid for the company’s control. The company sometimes
rest of the company intact. Asset Stripping – Acquire the co and sell the asset of the acquired co separately for p
themselves.
Different Types of Due Diligence before acquiring a possessing crown jewel are as follows:
1.       Operational Due Diligence to assess the functional operation of the firm and crown jewel separately. To identify the h
determine whether to indulge in asset stripping or retain the entire firm.
2.       Strategic Due Diligence to test the strategic rationale behind a proposed transaction and analysis on whether the deal is c
crown jewel will be realised.
3.       Technology Due Diligence to consider the aspect of current level of technology used in the business operations, investm
technology by firm its impact, physical verification of hardware and assets that form the technology.
4.       HR Due Diligence to identify the key managerial personnel in the firm and their influence and impact on the crown jew
impact and value of crown jewel if they leave, level of talent, proficiency and training currently existing and other people relate
5.       Environmental Due Diligence to identify the environmental risks and liabilities associated with the firm.

6.       Information Security Due Diligence to identify the risk involved in current IS of the firm like security of client data, priv
and technology can provide, procurement risk of new information technology towards security of information and impact of all

7.       Legal Due Diligence to identify if there are potential legal pitfalls or failure of following laws and other regulations
adversely impacted reducing its value, legal risk in intercompany transactions, acquisition of crown jewel, restriction or pro
antitrust issues, related party transactions etc., that could land the firm into severe constraints, legal battles, sacking of key man
8.       Marketing Due Diligence to identify the firm’s positioning and competitiveness, specific sectors or industry or market
market and industry related issues, identifying strategic value creating opportunities and achievability of business plan projectio
9.       Financial Due Diligence to assess the financial, commercial, operational and strategic assumptions. We review the acc
control systems, quality and sustainability of earnings and cash flow, condition and value of assets specifically the crown jewel
liabilities, capital maintained, liquidity, and tax implication on deal structure. This also helps in analysing the sustainability o
jewels.

Due Diligence is important in mergers and acquisition as one of the basic principles of business is prudence which requires us t
material facts while assessing the risk and opportunities of the proposed transaction and post transaction possibilities to ensure
acquisition criteria. This will help us create a trust between the two unrelated entities, identify the potential deal killers like min
due to potential antitrust issues etc., But most importantly due diligence helps us glean into the information that is necessary to
representations & warranties for indemnification. This helps in ascertaining purchase price, method of payment, details for draf
compliance of various laws and regulations. Due Diligence is extremely important in evaluating and executing deals.
Q1
Types of Mergers:
1.       Horizontal Merger – This type of merger occurs when there are 2 or more business entities join together or merge that ar
the same market or producing substitutes. E.g., Vodafone and Idea
2.       Vertical Merger – here two firms in that are producing different goods and services for one specific finished goods or in
operation merge. E.g., Reliance and FLAG Telecom group
3.       Conglomerate Merger – involve firms engaged in unrelated business activity that are not necessarily competitors but u
and/or marketing and distribution channel. E.g., L&T and Voltas Ltd

4.       Marketing Extension Merger – this merger takes place between two companies that deal in the same product but in separat

5.       Product Extension Merger – this type of merger takes place between two business organizations that are dealing in rela
E.g., The merger of Pizza Hut and PepsiCo in 1977

Efficiency Theories – The theory highlights that merger between two companies lead to improving the efficiency through low
gaining management efficiencies. Further, theory highlights the benefits of Economies of Scale to create synergy thus increas
Mergers are expected to create the operating synergy and help in strategic realignment to changing environment. In accor
expected to increase the firm’s market share of the combined entity thus increasing revenue or for growth opportunities or
access or even diversification of business. This merger also creates many tax benefits where tax losses can be carried forwa
profits of the merged entity.

For example, in the IT sector Tata Consultancy Services Ltd (TCS) had acquired French information technology (IT) servi
opportunity of about 30 billion euro in revenue, increase market visibility in Europe. TCS had made 14 acquisitions with th
Global Services Ltd to strengthen its business in the banking and financial services sector. It has bought the life and pension u
Group for around.