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How to do Valuation in Merger?

Reasons for Merger:
·         To diversify its business company takes the decision to merge with the company which is totally different from its business activity or product and services.
·         To eliminate or to reduce the market competition companies are join hand in the form of merger.
·         To increase the market size of a company, it is a best method to merge two similar companies.
·         To survive in a market, the loss making company merge with big companies and it works as a subsidiary company of an acquiring company.
·         To reduce the operating expenses and strengthen the financial position the two companies join hands in the form of merger.

Valuation of merger:

Example: Suppose Company XYZ wants to merge with Company PQR. Both the companies offers similar product and services to the customers. Company XYZ wants to know the earnings per share and market price per share of the company after merger. Find out with the help of given information:

Particulars
XYZ Company
PQR Company
Number of shares
5,00,000
4,26,000
Earnings per share
9
12
Price earnings ratio
10
15
Exchange ratio/swap ratio
1.25


Price Earnings ratio after merger is Rs. 10.

Solution:
Particulars
XYZ Company
PQR Company
After Merger (XYZ-PQR)
Net profit after tax
45, 00,000
51,12,000
96, 12,000
Number of shares
5,00,000
4,26,000
11, 32,500 (6, 00,000 + 5, 32,500
Earnings per share
9
12
8.48
Price Earnings ratio
10
15
10
Exchange ratio/swap ratio
1.25


Market Price (EPS*P/E ratio)
90
180
84.8

Number of shares after merger = 4, 26,000*1.25 = 5, 32,500

Example: Find out the pre-merger and post merger EPS of a company A and Company D also the exchange ratio according to the market price of shares and value of a company after merger. With the help of given information:
Particulars
Company A
Company D
Net profit after tax
5,00,000
3,00,000
Number of shares
3,20,000
2,00,000
Price Earnings ratio
8
7
EPS
?
?

Also find out:
·         The equivalent earnings per share of Company D shareholders.
·         How much shares issued to Company D’s shareholders of Company A’s shares.

Solution:
Particulars
Company A
Company D
Merger of Company A and Company D
Net profit after tax
7,00,000
6,25,000
13, 25,000
Number of shares
2,20,000
2,00,000
4, 16,000 (2, 20,000+1,96,000)
Price Earnings ratio
8
7
8
EPS (Net profit after tax / number of shares
3.18
3.12
3.18
Market price per share
25.44
21.84
25.44
Exchange ratio (according to EPS)
0.98


Exchange ratio (according to MPS)
0.85


Equivalent earnings per share

3.116 (3.18*0.98)

Shares issued of Company A to Company D shareholders

1, 96,000 (2, 00,000 * 0.98)


Exchange ratio (according to market price of per share) = Market price per share of company D / Market price per share of company A
= 21.84/25.44 = 0.85
Price earnings ratio of XYZ Company = Price earnings ratio after merger.
Value of a company after merger = 25.44* 4, 16,000 = 1, 05,83,040

Example: Company X wants to merge with Company P. The net profit after tax of company X is Rs. 8, 90,000 and the EPS is Rs. 10. The Net profit before tax is Rs. 10, 28,600 and EPS is Rs. 6. The exchange ratio between Company X and P is 0 which shows how much Company P given its shares for Company X 1 shares. Tax rate is 40%.The P/E ratio of Company X and P are Rs.6 and Rs. 5 respectively and after merger it is Rs.11. Find out exchange ratio where Company P shareholders not losses its earnings per share and also calculate is the merger good for the companies or not?

Solution:
Particulars
Company X
Company P
After Merger (X-P)
Net profit after tax
8, 90,000
4, 11,440
13, 01,440
Number of shares (Net profit after tax / EPS)
89,000
68, 573
1, 30,144 (89,000 + 41, 144)
Earnings per share
10
6
10
Price Earnings ratio
6
5
11
Exchange ratio/swap ratio
0.6


Market Price (EPS*P/E ratio)
60
11
110
Equivalent earnings per share

6.6(0.6*11)

Shares issued of Company A to Company D shareholders

41, 144 (0.6*68,573)

Pre-merger value (MPS*No. Of shares)
53, 40,000 (60*89,000)
4, 24,303 (11*68,573)

Post merger value
97, 90,000 (110*89,000)
45, 25,840 (110*41,144)

Post merger – Pre merger
44, 50,000
41, 01,537

NPV
3, 48,463



NPV is positive. So, the project is good for both the company’s share holders.


Comments

  1. Phani KumarJuly 12, 2020 8:18 pm

    Hey, thanks for the information. your posts are informative and useful. I am regularly following your posts.
    Indian markets

    ReplyDelete

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