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  2. 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 MERGERS AND ACQUISITIONS 2 CHAPTER 15
  3. 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. MERGERS AND ACQUISITIONS 3 CHAPTER 15
  4. 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. MERGERS AND ACQUISITIONS 4 CHAPTER 15
  5. 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. MERGERS AND ACQUISITIONS 5 CHAPTER 15
  6. 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
  7. 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. MERGERS AND ACQUISITIONS 7 CHAPTER 15
  8. 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
  9. 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
  10. 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. MERGERS AND ACQUISITIONS 10 CHAPTER 15
  11. 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 ] PE S P ) E (E [ ) S S ( ER AB A A B A B A A     ] PE 20.5 40 ) 0 6 (210 [ ) 8 20.5 ( ER AB A      ] S P - ) E )(E [(PE S P ER B B B A AB A B B   8] 14 - 60) 10 2 )( [(PE 20.5 14 ER AB B    
  13. 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. MERGERS AND ACQUISITIONS 13 CHAPTER 15
  14. 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 MERGERS AND ACQUISITIONS 14 CHAPTER 15
  15. 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. MERGERS AND ACQUISITIONS 15 CHAPTER 15