MERGERS AND ACQUISITIONS
CHAPTER
15

CONTENTS
 Introduction
 Meaning and definition of mergers
 Synergies from M&A
 Advantages of M&A
 Types of mergers
 M&A as a capital budgeting decisions: A valuation
framework
 Calculating Exchange Ratio
 Accounting for M&A
 Determination of exchange ratio in M&A
 Valuation of merger
 M&A Terminology
 M&A in India
 Regulatory framework of M&A in India
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INTRODUCTION
 M&A has emerged as a potent tool for corporate
consolidation and restructuring that is being used
by the firms world over.
 with a view to either reduce costs or to increase
revenues through market expansion or product
extension.
 It also facilitates in risk mitigation by combining
with firms in unrelated businesses.
 In case of firms that have entered the maturity
phase, M&A propels their growth.
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M & A
 Merger denotes fusion of two or more corporations with a
view to improving operational efficiency of merging entities.
 Mergers may be done with an existing company or companies
may decide to merge to form a new company.
 Merger can take either the form of absorption or
consolidation.
 M&A deals can be viewed from three different perspectives:
 as corporate restructuring decision,
 as a strategic decision, and
 as an investment decision.
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AMALGAMATION & TAKEOVER
 Merger refers to the combining of two or more firms
wherein the businesses of the merging firms is
combined
 An acquisition refers to an act of acquiring effective
control by one company over assets or management
of another company without any physical combination
of companies.
 Takeover is an unfriendly acquisition that is forced
upon the target firm against the wishes of its
management.
 In India, amalgamation is the legal term used for
merger.
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SYNERGIES OF MERGER
 M&A bring in certain operating and financial
synergies for the combining firms on account of
economies of scale.
 M&A are advantageous for the combining firms as
they boost both the top-line and the bottom-line
 Combining firms by enhancing the growth rate
and cutting down the competition.
 Besides they also mitigate the business risk
through diversification.
MERGERS AND ACQUISITIONS
6
(AB)
V
(B)
V
(A)
V 

CHAPTER 15

TYPES OF MERGERS
 There are three types of mergers;
 horizontal,
 vertical, and
 conglomerate.
 Horizontal merger involves combining of firms
dealing in similar products/ services
 Vertical merger is the combination of firms
operating at different stages of value chain within
the industry.
 Combination of unrelated businesses is termed
as conglomerate merger.
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NPV OF MERGER
 M&A entail huge capital outlay, have long-term
implications for cash flows of the acquired/merged
firms.
 M & A are evaluated like a capital budgeting
decisions.
 The NPV forms the basis for M&A decisions.
 The NPV in M&A is the difference between the
present value of the combined (merged) firm and
the sum of the present values of individual
merging firms.
MERGERS AND ACQUISITIONS
8
)
PV
(PV
-
)
(PV
Benefit B
A
AB 

CHAPTER 15

NPV OF MERGER
 Firm Alpha plans to acquire firm Beta. Following
are the pre-merger vital statistics of the two firms:
 Firm Alpha offers to the shareholders of firm Beta
one share in exchange for every two shares held by
them in Beta ltd. The merger is expected to bring
gains, which have a PV of Rs 50 lacs.
Alpha (A) Beta (B)
Market price per share (Rs.) 50 20
Book value per share (Rs.) 34 16
Number of outstanding shares 4,50,000 2,25,000
Market value of the firm (Rs.) 2,25,000,00 45,000,00
MERGERS AND ACQUISITIONS 9
B
AB PV
-
PV
=
Cost 
0.2
112500)
(450000
/
112500 



CHAPTER 15

NPV OF MERGER
PVAB = PVA + PVB + Benefit of merger
= 225 + 45 + 50 = Rs 320 (lacs)
Cost = PVAB − PVB
= 0.2 × 320 – 45= Rs 19 lacs
NPV to A =Benefit - Cost
= 50-19 = Rs 31 lacs
NPV to B = Cost to A = Rs 19 lacs.
Thus, in this case both Alpha ltd. and Beta ltd. are net
gainers from the merger as both get a positive NPV.
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EXCHANGE RATIO
Firm A Firm B
Total earnings, E Rs. (in lacs) 210 60
No. of shares outstanding, S (in lacs) 20.5 8
Earnings per Share, EPS (Rs.) 10.24 7.50
Price Earnings ratio, PE (times) 10 7
Market Price per share, P (Rs.) 40 14
CHAPTER 15
MERGERS AND ACQUISITIONS
11
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EXCHANGE RATIO
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CHAPTER 15

EXCHANGE RATIO
 The determination of exchange ratio is one of the
important aspects of an M&A deal.
 Exchange ratio (ER) is the ratio of number of
shares that the shareholders of acquired (merged)
firm receive in the combined firm in exchange for
the number of shares held by them in the
merging (acquired) firm.
 The M&A deal takes place in a phased manner.
 After identifying a target firm the acquiring firm makes
a tender offer,
 discovers the acquisition price, and
 finally makes the proposal to the target firm.
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M & A TERMINOLOGY
 Acquisition of controlling interest in a
target firm principally through debt is
termed as LBO
 MBO refers to the acquisition of controlling
interest in a firm by its management.
 Poison pill refers to strategy that is used by
the target firm to prevent its hostile
takeover. Such a strategy aims at making
the stock of the target firm less attractive
for the acquirer
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M & A IN INDIA
 In line with the global trends, Indian business
environment has also witnessed growing number
and value of M&A deals.
 One major shift that has been noticed of late is
that the number and value of outbound M&A
deals by Indian firms has outpaced the number of
the inbound deals.
 Besides the M&A deals today are happening in
varied sectors unlike a few selected sectors in
past.
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CHAPTER 15