Problems of Merger and Acquisitions – Module 5

1. Rosy limited is contemplating the purchase of Lily limited. Rosy limited has 3,00,000 shares
having a market price of Rs. 30 per share while Lily limited has 2,00,000 shares selling at Rs.
20 per share. The EPS of Rosy limited and Lily limited are Rs. 4 and Rs. 2.25 respectively.
Management of both the companies are discussing proposal for exchange of 0.5 shares of Rosy
limited for 1 share of Lily limited. You are required to

a. Calculate the EPS after merger

b. Show the impact on EPS for the shareholders of both the companies.

2. Company X is contemplating the purchase of Company Y, Company X has 3,00,000 shares

having a market place of Rs. 30 per share, while Company Y has 2,00,000 shares selling at Rs.
20 per share. The EPS are Rs. 4.00 and Rs. 2.25 for Company X and Y respectively.
Managements of both companies are discussing two alternative proposals for exchange of
shares as indicated below:

a. in proportion to the relative earnings per share of two companies.

b. 0.5 share of Company X for one share of Company Y (0.5:1)

You are required

1. To calculate the earnings per share (EPS) after merger under two alternatives; and

2. To show the impact on EPS for the shareholders of two companies under both the
alternatives. (2021 – 10 Marks)

3. East Company limited is studying the possible acquisition of Fast Company limited by way
of merger. The following data are available in respect of the companies.

Particulars East Company Limited Fast Company Limited

Earnings after Tax 2,00,000 60,000
Number of equity shares 40,000 10,000
Market Value per Share 15 12
1. If the merger goes through by exchange of equity share and the exchange ratio is based on
the current market price, what is the new earnings per share for East Company Limited?

2. Fast Company limited 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?
4. XYZ limited is intending to acquire ABC limited by merger and the following information
is available in respect of both the companies

Particulars XYZ limited ABC limited

No. of equity shares 5,00,000 3,00,000
Profit after tax 25,00,000 9,00,000
Market price per share 21 14
a. Calculate the present EPS of both companies

b. If the proposed merger takes place what would be the new EPS of XYZ limited? Assume
that the merger takes place by exchange of equity shares and the exchange ratio is based on the
current market price.

c. Will you recommend the merger of both the companies? Justify your answer.

5. As the General Manager (Finance) of Zenith Limited you are investigating the acquisition
of Starlight limited. The following facts are given:

Particulars Zenith limited Starlight limited

Earnings per share 6.75 2.50
Dividend per share 3.25 1.00
Price per share 48 15
Number of shares 60,00,000 20,00,000
Investor currently expected the dividends and earnings of Starlight to grow at a steady rate of
7%. After acquisition, this growth rate would increase to 8% without any additional
investment.

Required

a. What is the benefit of the acquisition?

b. What is the cost of the acquisition to Zenith limited if it pays

1. Rs. 17 per share compensation (cash) to Starlight limited and

2. Offer one share for every 3 shares of Starlight limited.

6. Amir limited plans to acquire Jamir limited. The relevant financial details of the 2 firms
prior to merger announcement are given below: (5 marks – 2022)

Particulars Amir limited Jamir Limited

Market price per share 500 100
No. of shares 600,000 200,000
The merger is expected to bring gains which have a present value of Rs. 20 million. Amir
limited offers one share in exchange for every four shares of Jamir limited.

Required:

a. What is the true cost of Amir limited for acquiring Jamir limited?

b. What is the net present value of the merger to Amir Limited?

c. What is the net present value of the merger to Jamir Limited?

7. America limited plans to acquire Japan limited. The relevant financial details of the 2 firms
prior to merger announcement are given below:

Particulars America limited Japan Limited

Market price per share 100 40
No. of shares 800,000 300,000
The merger is expected to bring gains which have a present value of Rs. 12 million. Amir
limited offers two share in exchange for every three shares of Japan limited.

Required:

a. What is the true cost of America limited for acquiring Japan limited?

b. What is the net present value of the merger to America Limited?

c. What is the net present value of the merger to Japan Limited?

8. Kamal Company has a value of Rs. 80 million and Jamal Company has a value of Rs. 30
million. If the two companies merge, cost savings with a present value of Rs. 10 million would
occur. Kamal proposed to offer Rs. 35 million cash compensation to acquire Jamal. What is
the net present value of the merger to the two firms? (2022 – 5 marks)

9. Arun Company has a value of Rs. 40 million and Varun Company has a value of Rs. 20
million. If the two companies merge, cost savings with a present value of Rs. 5 million would
occur. Arun proposes to offer Rs. 22 million cash compensation to acquire Varun. What is the
net present value of the merger to the two firms?
10. Vijay company plants to acquire Ajay company. The following are the relevant financials
of the two companies

Particulars Vijay company Ajay Company

Total Earnings E Rs. 200 million Rs. 100 million
No.of Outstanding shares 20 million 10 million
Market price per share Rs. 200 Rs. 120
a. What is the maximum exchange ratio acceptable to the shareholders of Vijay company if the
PE ratio of the combined company is 18 and there is no synergy gain?

b. What is the minimum exchange ratio acceptable to the shareholders of Ajay company if the
PE ratio of the combined company is 18 and there is a synergy gain of 6%?

c. If there is no synergy gain, at what level of PE multiple will the line ER1 and ER2 intersect.

d. If the expected synergy gain in 8%, What exchange ratio will result in a post-merger earnings
per share of Rs. 11?

e. Assume that the merger is expected to generate gain which have a present value of Rs. 400
million and the exchange ratio agreed is 0.6. What is the true cost of the merger from the point
of view of Vijay Company?

11. Jeet Company plans to acquire Ajeet Company. The following are the relevant financials
of the 2 company.

Particulars Jeet company Ajay Company

Total earnings E Rs. 1600 million Rs. 600 million
No. of Outstanding share 40 million 30 million
Market price per share Rs. 900 Rs. 360
a. What is the maximum exchange ratio acceptable to the shareholders of Jeet Company if the
PE ratio of the combined company is 21 and there is no synergy gain?

b. What is the minimum exchange ratio acceptable to the shareholders of Ajeet company if the
PE ratio of the concerned company is 20 and there is a synergy benefit of 8%?

c. If there is no synergy gain, at what level of PE multiple will the lines of ER1 and ER2
intersect?

d. If the expected synergy gain is 10%, What exchange ratio will result in a post-merger
earnings per share of Rs. 30?

e. Assume that the merger is expected to generate gains which have a present value of Rs. 5000
million and the exchange ratio agreed is 0.45. What is the true cost of the merger from the
point of view of Jeet company?
12. Shaan Company plans to acquire Aan Company. The following are the relevant financials
of the two companies

Particulars Shaan Company Aan Company

Total earnings, E Rs. 750 million Rs. 240 million
Number of outstanding shares 50 million 20 million
Market price per share Rs. 250 Rs. 150
a. What is the maximum exchange ratio acceptable to the shareholders of Shaan Company if
the PE ratio of the combined company is 15 and there is no synergy gain?

b. What is the minimum exchange ratio acceptable to the shareholders of Aan company if the
PE ratio of the combined entity is 15 and there is a synergy benefit of 6%?

c. If there is no synergy gain, at what level of PE multiple will the lines ER1 and ER2 intersect?

d. If the expected synergy gain is 6%, what exchange ratio will result in a post-merger earnings
per share of Rs. 16?

Assume that the merger is expected to generate gains which have a present value of Rs. 600
million and the exchange ratio agreed is 0.60. What is the true cost of the merger from the
point of view of Shaan Company?

13. X limited is considering the proposal to acquire Y limited and the financial information is
given below:

Particulars X limited Y limited

No. of equity shares 10,00,000 6,00,000
Market price per share 30 18
Market capitalization 3,00,00,000 1,08,00,000
X limited intends to pay Rs. 1, 40, 00,000 in cash for Y limited. If Y limited market price
reflects only its value as a separate entity, calculate the cost of merger in financed by cash.

Assignment 5 and 6
1. Amir limited plans to acquire Jamir limited. The relevant financial details of the 2 firms
prior to merger announcement are given below: (5 marks – 2022)

Particulars Amir limited Jamir Limited

Market price per share 500 100
No. of shares 600,000 200,000
The merger is expected to bring gains which have a present value of Rs. 20 million. Amir
limited offers one share in exchange for every four shares of Jamir limited.

Required:

a. What is the true cost of Amir limited for acquiring Jamir limited?

b. What is the net present value of the merger to Amir Limited?

c. What is the net present value of the merger to Jamir Limited?

2. Explain the SEBI regulations on takeover. (2022 – 5 marks)

3. Explain the Anti-takeover strategies ( 2022 – 5 marks)

4. Kamal Company has a value of Rs. 80 million and Jamal Company has a value of Rs. 30
million. If the two companies merge, cost savings with a present value of Rs. 10 million would
occur. Kamal proposed to offer Rs. 35 million cash compensation to acquire Jamal. What is
the net present value of the merger to the two firms? (2022 – 5 marks)

5. Shaan Company plans to acquire Aan Company. The following are the relevant financials
of the two companies

Particulars Shaan Company Aan Company

Total earnings, E Rs. 750 million Rs. 240 million
Number of outstanding shares 50 million 20 million
Market price per share Rs. 250 Rs. 150
a. What is the maximum exchange ratio acceptable to the shareholders of Shaan Company if
the PE ratio of the combined company is 15 and there is no synergy gain?

b. What is the minimum exchange ratio acceptable to the shareholders of Aan company if the
PE ratio of the combined entity is 15 and there is a synergy benefit of 6%?

c. If there is no synergy gain, at what level of PE multiple will the lines ER1 and ER2 intersect?

d. If the expected synergy gain is 6%, what exchange ratio will result in a post-merger earnings
per share of Rs. 16?

Assume that the merger is expected to generate gains which have a present value of Rs. 600
million and the exchange ratio agreed is 0.60. What is the true cost of the merger from the
point of view of Shaan Company? (2022 – 10 marks)

6. As the financial Manager (Finance) of National Company you are investigating the
acquisition of Regional Company. The following facts are given:
Particulars National limited Regional limited
Earnings per share 8.00 3.00
Dividend per share 5.00 2.50
Price per share 86 24
Number of shares 8,000,000 3,000,000
Investor currently expected the dividends and earnings of Regional to grow at a steady rate of
6%. After acquisition, this growth rate would increase to 12% without any additional
investment.

Required

a. What is the benefit of the acquisition?

b. What is the cost of the acquisition to National limited if it pays

1. Rs. 17 per share compensation (cash) to Regional Company and

2. Offer two share for every 5 shares of Regional Company? (2022- 10 marks)

7. Explain in detail anti-takeover defences used by Target Compnay ( 5 marks – 2021)

8. what is leverage buyout, explain with suitable example? ( 2021 – 5 marks)

9. Company X is contemplating the purchase of Company Y, Company X has 3,00,000 shares

having a market place of Rs. 30 per share, while Company Y has 2,00,000 shares selling at Rs.
20 per share. The EPS are Rs. 4.00 and Rs. 2.25 for Company X and Y respectively.
Managements of both companies are discussing two alternative proposals for exchange of
shares as indicated below:

a. in proportion to the relative earnings per share of two companies.

b. 0.5 share of Company X for one share of Company Y (0.5:1)

You are required

1. To calculate the earnings per share (EPS) after merger under two alternatives; and

2. To show the impact on EPS for the shareholders of two companies under both the
alternatives. (2021 – 10 Marks)