MERGERS & ACQUISITION

Q.1 XYZ Ltd. is considering merger with PQR Ltd. XYZ Ltd's, shares are currently
traded at Rs.25. It has 200000 shares outstanding and its EAT amount to Rs.400000.
PQR Ltd. has 100000 shares outstanding; its current MPS is Rs.12.50 and its EAT are
Rs.100000. The merger will be effected by means of a Stock Swap (exchange). PQR Ltd.
has agreed to a plan under which XYZ Ltd. will offer the current Market Value of PQR
Ltd's Shares:

1. What is the pre-merger EPS and P/E ratios of both the companies?
2. If PQR Ltd's P/E Ratio is 8, what is its current MPS? What is the exchange ratio?
What will XYZ Ltd's post-merger EPS be ?
3. What must be the exchange ratio for XYZ Ltd's so that the pre and post-merger EPS
to be the same?

Q.2 Axis Ltd. is intending to acquire Dena Ltd. by merger and the following information
is available in respect of the companies.
Particulars Axis Ltd. Dena Ltd.
Equity Share Capital of Rs.10 each (Rs. Lakhs) 450 90
Earnings after Tax (Rs. Lakhs) 90 18
Market Price per share (Rs.) 60 46

Required:
1. What is the present EPS of both the companies?
2. What is the present Price Earning Ratios (P/E Ratios) of both the companies?
3. If the proposed merger takes place, what would be the new EPS for Axis Ltd.
(assuming that the merger takes place by exchange of equity shares and the
exchange ratios is based on the current market prices)
4. What should be the exchange ratio if, Axis Ltd. wants to ensure the same EPS to
members as before the merger takes place?

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Q.3 Om Ltd. is intending to acquire Alp Ltd. (by merger) and the following information
is available in respect of the companies.
Particulars Om Ltd. Alp Ltd.
Number of Equity Shares 10,00,000 6,00,000
Earning after Tax (Rs.) 50,00,000 18,00,000
Market Value per Share
(Rs.) 42 28
Required :
1) What is the present EPS of both the companies?
2) What is the present Price Earning Ratio. (P/E Ratio) of both the companies?
3) If the proposed merger take place, what would be the new EPS for Om Ltd.
(assuming that the merger takes place by exchange of equity shares and the
exchange ratio is based on the current market price.)
4) What should be the exchange ratio if, Alp Ltd. wants to ensure the same EPS to
members as before the merger take place?

Q.4 Priya Ltd. is intending to acquire Lemon Ltd. by merger and the following
information is available in respect of the companies.
Particulars Priya Ltd. Lemon Ltd.
Equity share capital of Rs. 10 each (Rs.
Millions) 450 180
Earnings after Tax (Rs. Millions) 90 18
Market price of each Share (Rs.) 60 37
Required
1. What is the present EPS of both companies?
2. What is the present Price Earnings Ratios (P/E Ratios) of both the companies?
3. If the proposed merger takes place, what would be the new EPS for Priya Ltd.
(assuming that the merger takes place by exchange of equity shares and the
exchange ratio is based on the current market prices)?
4. What should be the exchange ratio if, Priya Ltd. wants to ensure the same EPS to
members as before the merger takes place?

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 Q.5 East Company Ltd. is studying the possible acquisition of Fost Co. Ltd. by way
of merger. The following data are available in respect of the companies:
Particulars East Co. Ltd. Fost Co. Ltd.
Earning after Tax (Rs.) 2,00,000 60,000
No. of Equity Shares 40,000 10,000
Market value per share (Rs.) 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 EPS for Easy Co. Ltd.?
2. Fost Co. 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?

Q.6 Arvind Limited wants to acquire Vijay Limited. Exchange ratio is decided as 14/39
i.e. 0.359
The following financial data is available:
Arvind Vijay
Profit after Tax (PAT) Rs. 9,00,000 1,80,000
Number of Shares Nos. 3,00,000 90,000
Market Price per Share (MPS) Rs. 36 20
Calculate:
1) EPS and PE Ratio of both the firms before acquisition.
2) The number of equity shares required to be issued by Arvind for acquiring Vijay.
3) EPS of Arvind after acquisition.
4) Market price of share of Arvind after acquisition; assuming PE Ratio remains
unchanged.
5) The market value of the merged entity.

Q.7 Large Company is considering the acquisition of Small Company in a stock-for-

stock transaction in which the target company is valued at Rs.85 for each of its common
stock. The acquiring company does not expect any change in P/E ratio multiple after
the merger and choose to value the target company conservatively by assuming no
earning growth due to synergy.

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Calculate:
The purchase price premium
The exchange ratio
The no. of new shares issued by the acquiring company
Post merger EPS of the combined firms
Pre merger EPS of the acquiring company
Pre merger P/E ratio
Post merger share price
Post merger equity ownership distribution
The following additional information is available:
Particulars Large Small
Earning Rs. 2,50,000 Rs. 72,500
No. of Shares 1,10,000 20,000
Market Price Rs. 52 Rs.64

Q.8 X Ltd. is considering the acquisition with Y Ltd. with stock. Relevant financial
information is given below:
Particulars X Ltd. Y Ltd.
Present Earning (Amount in Lakhs) Rs.75 Rs.40
Equity Shares (No. of Shares) 40,00,000 32,00,000
EPS (Rs.) 1.875 1.25
P/E Ratio 10 6
Market Price Rs.18.75 Rs.7.5
A Ltd. is thinking of 4 possibilities of arriving at Exchange Ratio ER:
1. Exchange Ratio as per market price.
2. To offer a premium of 30% over market price of Y Ltd.
3. Exchange Ratio as per EPS.
4. Exchange Ratio as per P/E.
In each case, calculate:
1) Ratio of exchange
2) EPS Post merger.
3) Number of new shares to be issued.

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Q.9 XYZ Ltd. is planning to acquire PQR Ltd. Since the current EPS is Rs.5 for the XYZ
Company, the management is keen to get EPS of Rs.6 at least post merger. They seek
your advice on the possible exchange ratio that would give the merged entity an EPS of
Rs.6. It is also provided that the acquisition would result in a synergy of 200 Lakh. The
following financial data is given:
Particulars XYZ Ltd. PQR Ltd.
EPS Rs.5 Rs.4
No. of Shares 200 Lakh 80 Lakh
Market Price Rs.100 Rs.70

Q.10 AIM Ltd. is considering merger with MAX Ltd. There are no Synergy gains from
the merging. Complete the following table if Aim wishes an EPS of Rs.2.80 after the
merger.
Particulars AIM Ltd. MAX Ltd. Merged Entity
Earnings After Tax Rs.0.1 million Rs.0.25 million ?
Outstanding Shares 50,000 1,00,000 ?
EPS (Rs.) 2 2.5 2.8
P / E Ratio 10 5 ?
Market Price Rs.20 Rs.12.5 ?
Total Market Value ? ? ?

1. Complete the above table

2. Calculate the exchange ratio viz. no. of shares of AIM given to MAX shareholder.
3. What is the cost of merger to AIM Ltd.