MERGERS,

ACQUISITIONS
& RESTRUCTURING

Ques on 1 Study Material, (8 Marks) CA Final Nov 2007, May 2018, Nov 2022
A Ltd. wants to acquire T Ltd. and has offered a swap ra o of 1:2 (0.5 shares for every one share of T Ltd).
Following informa on is provided:
A Ltd. T Ltd.
Profit A er tax ` 18,00,000 ` 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS `3 `2
PE Ra o 10 Times 7 Times
Market price per share ` 30 ` 14
Required:
i. The number of equity shares to be issued by A Ltd. for acquisi on of T Ltd.
ii. What is the EPS of A Ltd. a er the acquisi on?
iii. Determine the equivalent earnings per share of T Ltd.
iv. What is the expected market price per share of A Ltd. a er the acquisi on assuming
its PE mul ple remains unchanged?
v. Determine the market value of the merged firm.

[Ans: (i) 90000 (ii) 3.13 (iii) 1.565 (iv) 31.3 (v) 2,15,97,000 ]

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 2 Study Material

You have been provided the following financial data of two companies
Krishna Ltd. Rama Ltd.
Earnings a er Taxes ₹ 7,00,000 ₹ 10,00,000
Equity share outstanding 2,00,000 4,00,000
EPS 3.5 2.5
P/E Ra o 10 Times 14 Times
Market price per share ₹ 35 ₹ 35
Company Rama Ltd. is acquiring the company Krishna Ltd., exchanging its shares on a one-to-one basis for
company Krishna Ltd. The exchange ra o is based on the market price of the shares of the two companies.
Required:
(i) What will be the EPS subsequent to merger?
(ii) What is the change in EPS for the shareholders of companies Rama Ltd. & Krishna Ltd.?
(iii) Determine the market value of the post-merger firm. PE ra o is likely to remain the same.
(iv) Ascertain the profits accruing to shareholders of both the companies?

Ques on 3 Study Material, CA Final May 2003, May 2005

XYZ Ltd., is considering merger with ABC Ltd. XYZ Ltd.'s shares are currently traded at ` 20. It has 2,50,000
shares outstanding and its earnings a er taxes (EAT) amount to ` 5,00,000. ABC Ltd., has 1,25,000 shares
outstanding; its current market price is ` 10 and its EAT are ` 1,25,000. The merger will be effected by means of
a stock swap (exchange). ABC Ltd., has agreed to a plan under which XYZ Ltd., will offer the current market
value of ABC Ltd's shares:
(i) What is the pre-merger earning per share (EPS) and P/E ra os of both the companies?
(ii) If ABC Ltd.'s P/E ra o is 6.4, what is current market price? What will XYZ Ltd.'s post merger EPS be?
(iii) What would be the gain or loss in (ii) above?
(iv) What should be the exchange ra o, if XYZ Ltd's pre merger and post-merger EPS are to be the same?

[Ans: (i) 2,1,10,10 (ii) 6.4, 2.16 (iii) 40000,(38600) (iv)0.5:1 ]

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 4 Study Material

P Ltd. is considering take-over of R Ltd. by the exchange of four new shares in P Ltd. for every five shares in R
Ltd. The relevant financial details of the two companies prior to merger announcement are as follows:
P Ltd R Ltd
Profit before Tax (₹ Crore) 15 13.50
No. of Shares (Crore) 25 15
P/E Ra o 12 9
Corporate Tax Rate 30%

You are required to determine:

(i) Market value of both the company.
(ii) Value of original shareholders.
(iii) Price per share a er merger.
(iv) Effect on share price of both the company if the Directors of P Ltd. expect their own pre-merger P/E ra o
to be applied to the combined earnings.

Ques on 5 Study Material, (12 Marks) CA Final Nov 2008, CA Final May 2015, Jan 2021

BA Ltd, and DA Ltd. both the companies operate in the same industry. The Financial statements of both the
companies for the current financial year are as follows:

Balance Sheet `
Par culars BA Ltd. DA Ltd.
Current Assets 14,00,000 10,00,000
Fixed Assets (Net) 10,00,000 5,00,000
Total (`) 24,00,000 15,00,000
Equity capital (` 10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 -
14% long-term debt 5,00,000 3,00,000
Current liabili es 7,00,000 4,00,000
Total (`) 24,00,000 15,00,000

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Income Statement `

BA Ltd. DA Ltd.
Net sales 34,50,000 17,00,000
Cost of Goods sold 27,60,000 13,00,000
Gross profit 6,90,000 3,40,000
Opera ng expenses 2,00,000 1,00,000
Interest 70,000 42,000
Earnings before taxes 4,20,000 1,98,000
Taxes at 50% 2,10,000 99,000
Earnings a er taxes (EAT) 2,10,000 99,000
Addi onal informa on:
No. of Equity shares 1,00,000 80,000
Dividend payment ra o (D/P) 40% 60%
Market price per share ` 40 ` 15

Assume that both companies are in the process of nego a ng a merger through an exchange of equity shares.
You have been asked to assist in establishing equitable exchange terms and are required to:
(i) Decompose the share price of both the companies into EPS and P/E components; and also segregate
their EPS figures into Return on Equity (ROE) and book value/intrinsic value per share components.
(ii) Es mate future EPS growth rates for each company.
(iii) Based on expected opera ng synergies BA Ltd. es mates that the intrinsic value of DA's equity share
would be ` 20 per share on its acquisi on. You are required to develop a range of jus fiable equity share
exchange ra os that can be offered by BA Ltd. to the shareholders of DA Ltd. Based on your analysis in
part (i) and (ii), would you expect the nego ated terms to be closer to the upper, or the lower exchange
ra o limits and why?
(iv) Calculate the post-merger EPS based on an exchange ra o of 0.4:1 being offered by BA Ltd. Indicate the
immediate EPS accre on or dilu on, if any, that will occur for each group of shareholders.
(v) Based on a 0.4:1 exchange ra o and assuming that BA Ltd.'s pre-merger P/E ra o will con nue a er the
merger, es mate the post-merger market price. Also show the resul ng accre on or dilu on in pre-
merger market prices.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 6 (8 Marks) CA Final May 2019

Given is the following informa on:
Day Ltd. Night Ltd.
Net Earnings ` 5 crores ` 3.5 crores

No. of Equity Shares 10,00,000 7,00,000

The shares of Day Ltd. and Night Ltd. trade at 20 and 15 mes their respec ve P/E ra os. Day Ltd. considers
taking over Night Ltd. by paying ` 55 crores considering that the market price of Night Ltd. reflects its true
value. It is considering both the following op ons:
I. Takeover is funded en rely in cash.
II. Takeover is funded en rely in stock.
You are required to calculate the cost of the takeover and advise Day Ltd. on the best alterna ve.

Also calculate Purchases Price Premium offered by Day Ltd.

Ques on 7 Study Material

Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior to the
merger announcement are:
Elrond Limited Doom Limited
Market price per share ` 50 ` 25

Number of outstanding shares 20 lakhs 10 lakhs

The merger is expected to generate gains, which have a present value of ` 200 lakhs. The exchange ra o
agreed to is 0.5.

What is the true cost of the merger from the point of view of Elrond Limited?

Ques on 8 Study Material, Prac ce Manual, RTP Nov 2022

AFC Ltd. wishes to acquire BCD Ltd. The shares issued by the two companies are 10,00,000 and 5,00,000
respec vely. Calculate the increase in the total value of BCD Ltd. resul ng from the acquisi on on the basis of
the following condi ons:

Current Expected growth rate of BCD Ltd. 7%

Expected growth rate under control of AFC Ltd. 8%
(without any addi onal capital investment and
without any change in risk of opera ons)
Current Market Price per share of AFC Ltd. ` 100
Current Market Price per share of BCD Ltd. ` 20
Expected Dividend per share of BCD Ltd. ` 0.60
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 MERGERS, ACQUISITIONS & RESTRUCTURING

On the basis of aforesaid condi ons calculate the gain or loss to shareholders of both the companies, if AFC
Ltd. were to offer one of its share for every four shares of BCD Ltd.

Calculate the gain to the shareholders of both the companies, if AFC Ltd. pays ` 22 for each share of BCD Ltd,
assuming the PE Ra o of AFC Ltd. does not change a er the merger. EPS of AFC Ltd. is ` 8 and that of BCD is `
2.50. It is assuming that AFC Ltd. invests its cash to earn 10%.

Ques on 9 Exam Nov 2020

ICL is proposing to take over SVL with an objec ve to diversify. ICL's profit a er tax (PAT) has grown @ 18 per
cent per annum and SVL's PAT is grown @ 15 per cent per annum. Both the companies pay dividend regularly.
The summarised Profit & Loss Account of both the companies are as follows:
Par culars ICL SVL
Net Sales 4.545 1,500
PBlT 2,980 720
Interest 750 25
Provision for Tax 1,440 445
PAT 790 250
Dividends 235 125

ICL SVL
Fixed Assets
Land & Building (Net) 720 190
Plant & Machinery (Net) 900 350
Furniture & Fixtures (Net) 30 1,650 10 550
Current Assets 775 580
Less: Current Liabili es
Creditors 230 130
Overdra s 35 10
Provision for Tax 145 50
Provision for dividends 60 470 50 240
Net Assets 1,995 890
Paid up Share Capital (₹ 10 per share) 250 125
Reserves and Surplus 1,050 1,300 660 785
Borrowing 665 105
Capital Employed 1,955 890
Market Price Share (₹) 52 75

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 MERGERS, ACQUISITIONS & RESTRUCTURING

ICL's Land & Buildings are stated at current prices. SVL's Land & Buildings are revalued three years ago. There
has been an increase of 30 per cent per year in the value of Land & Buildings.

SVL is expected to grow @ 18 per cent each year, a er merger.

ICL's Management wants to determine the premium on the shares over the current market price which can be
paid on the acquisi on of SVL.

You are required to determine the premium using:

(i) Net Worth adjusted for the current value of Land & Buildings plus the es mated average profit a er
tax (PAT) for the next five years.
(ii) The dividend growth formula.
(iii) ICL will push forward which method during the course of nego a ons?
Period (t) 1 2 3 4 5
FVIF (30%, t) 1.300 1.690 2.197 2.856 3.713
FVIF (15%, t) 1.15 2.4725 3.9938 5.7424 7.7537

Ques on 10 Study Material, CA Final May 2005, Nov 2015, RTP May 2023
The following informa on is provided rela ng to the acquiring company Efficient Ltd. and the target Company
Healthy Ltd.
Par culars Efficient Ltd. Healthy Ltd.
No. of shares (F.V. ` 10 each) 10.00 lakhs 7.5 lakhs
Market capitaliza on 500.00 lakhs 750.00 lakhs
P/E ra o ( mes) 10.00 5.00
Reserves and Surplus 300.00 lakhs 165.00 lakhs
Promoter's Holding (No. of shares) 4.75 lakhs 5.00 lakhs

Board of Directors of both Companies have decided to give a fair deal to the shareholders and accordingly for
swap ra o the weights are decided as 40%, 25% and 35% respec vely for Earning, Book Value and Market
Price of share of each company:
(i) Calculate the swap ra o and also calculate Promoter's holding % a er acquisi on.
(ii) What is the EPS of Efficient Ltd. a er acquisi on of Healthy Ltd.?
(iii) What is the expected market price per share and market capitaliza on of Efficient Ltd. a er acquisi on,
assuming P/E ra o of Firm Efficient Ltd. remains unchanged.
(iv) Calculate free float market capitaliza on of the merged firm.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 11 Study Material

B Ltd. is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth
in earnings and dividends is reflected in its PE ra o of 17. The Board of Directors of B Ltd. has been advised that
if it were to take over firms with a lower PE ra o then its own, using a share-for –share exchange, then it could
increase its reported earnings per share. C Ltd. has been suggested as possible target for a takeover, which has
a PE ra o of 10 and 1,00,000 shares in issue with a share price of ` 15, B Ltd. has 5,00,000 shares in issue with a
share price of ` 12.

Calculate the change in earning per share of B Ltd. if it acquires the whole of C Ltd. at its market price of ₹ 12.
Assume the price of B Ltd. shares remains constant.

Ques on 12 Study Material, CA Final RTP May 2018, (12 Marks) Nov 2018 (Similar)
T Ltd. and E Ltd. are in the same industry. The former is in nego a on for acquisi on of the la er. Important
informa on about the two companies as per their latest financial statements is given below:
T Ltd. E Ltd.
` 10 Equity shares outstanding 12 Lakhs 6 Lakhs

Debt :
10% Debentures (` Lakhs) 580 —
12.5% Ins tu onal Loan (` Lakhs) — 240
Earning before interest, deprecia on and tax 400.86 115.71
(EBIDAT) (` Lakhs)
Market Price/share (`) 220.00 110.00

T Ltd. plans to offer a price for E Ltd., business as a whole which will be 7 mes EBIDAT reduced by outstanding
debt, to be discharged by own shares at market price.
E Ltd. is planning to seek one share in T Ltd. for every 2 shares in E Ltd. based on the market price. Tax rate for
the two companies may be assumed as 30%.
Calculate and show the following under both alterna ves - T Ltd.'s offer and E Ltd.'s plan:
(i) Net considera on payable.
(ii) No. of shares to be issued by T Ltd.
(iii) EPS of T Ltd. a er acquisi on.
(iv) Expected market price per share of T Ltd. a er acquisi on.
(v) State briefly the advantages to T Ltd. from the acquisi on.

Calcula ons (except EPS) may be rounded off to 2 decimals in lakhs.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 13 Study Material, CA Final May 2006, RTP May 2019

Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The par culars of 2
companies are given below:
Par culars Reliable Industries Ltd. Sunflower Industries Ltd.
Earnings A er Tax (EAT) ` 20,00,000 ` 10,00,000

Equity shares O/s 10,00,000 10,00,000

Earnings per share (EPS) 2 1
PE Ra o (Times) 10 5

Required:
(i) What is the market value of each Company before merger?
(ii) Assume that the management of RIL es mates that the shareholders of SIL will accept an offer of one
share of RIL for four share of SIL. If there are no synergic effects, what is the market value of the Post-
merger RIL? What is the new price per share? Are the shareholders of RIL be er or worse off than they
were before in merger?
(iii) Due to synergic effects, the management of RIL es mates that the earnings will increase by 20%. What is
the new post-merger EPS and Price per share? Will the shareholders be be er off or worse off than
before the merger?

Ques on 14 Study Material

Longitude Limited is in the process of acquiring La tude Limited on a share exchange basis. Following relevant
data are available:
Longitude Limited La tude Limited
Profit a er Tax (PAT) ` In lakhs 120 80
Number of shares Lakhs 15 16
EPS ` 8 5
PE Ra o 15 10
(Ignore Synergy)
You are required to determine:
(i) Pre-merger Market Value per share, and
(ii) The maximum exchange ra o Longitude Limited can offer without the dilu on of
1. EPS and
2. Market Value per share
Calculate Ra o/s up to four decimal points and amounts and number of shares up to two decimal points.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 15 Study Material, (6 Marks) CA Final May 2014, MTP Sep 2022
The equity shares of XYZ Ltd. are currently being traded at ` 24 per share in the market. XYZ Ltd. has total
10,00,000 equity shares outstanding in number; and promoters' equity holding in the company is 40%.

PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The es mated present value of these synergies
is ` 80,00,000.

Further PQR feels that management of XYZ Ltd. has been over paid. With be er mo va on, lower salaries and
fewer perks for the top management, will lead to savings of ` 4,00,000 p.a. Top management with their
families are promoters of XYZ Ltd. Present value of these savings would add ` 30,00,000 in value to the
acquisi on.
Following addi onal informa on is available regarding PQR Ltd.:
Earnings per share : `4
Total number of equity shares outstanding : 15,00,000
Market price of equity share : ` 40

Required:
(i) What is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.?
(ii) What is the minimum price per equity share at which the management of XYZ Ltd. will be willing to offer
their controlling interest?

Ques on 16 Study Material

The CEO of a company thinks that shareholders always look for EPS. Therefore he considers maximiza on of
EPS as his company's objec ve. His company's current Net Profits are ` 80 lakhs and P/E mul ple is 10.5. He
wants to buy another firm which has current income of ` 15.75 lakhs & P/E mul ple of 10.

What is the maximum exchange ra o which the CEO should offer so that he could keep EPS at the current
level, given that the current market price of both the acquirer and the target company are ` 42 and ` 105
respec vely?

If the CEO borrows funds at 15% and buys out Target company by paying cash, how much should he offer to
maintain his EPS? Assume tax rate of 30%.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 17 Study Material, (8 Marks) CA Final MTP October 2019

During the audit of the Weak Bank (W), RBI has suggested that the Bank should either merge with another
bank or may close down. Strong Bank (S) has submi ed a proposal of merger of Weak Bank with itself. The
relevant informa on and Balance Sheets of both the companies are as under:
Par culars Weak Bank Strong Bank Assigned
(W) (S) Weights
(%)
Gross NPA (%) 40 5 30
Capital Adequacy Ra o (CAR) 5 16 28
[Total Capital/ Risk Weight Asset]
Market price per Share (MPS) 12 96 32
Book value 10
Trading on Stock Exchange Irregular Frequent

Balance Sheet (` in Lakhs)

Par culars Weak Bank (W) Strong Bank (S)
Paid up Share Capital (` 10 per share) 150 500
Reserves & Surplus 80 5,500
Deposits 4,000 44,000
Other Liabili es 890 2,500
Total Liabili es 5,120 52,500
Cash in Hand & with RBI 400 2,500
Balance with Other Banks - 2,000
Investments 1,100 19,000
Advances 3,500 27,000
Other Assets 70 2,000
Preliminary Expenses 50 -
Total Assets 5,120 52,500
You are required to
(i) Calculate Swap ra o based on the above weights
(ii) Ascertain the number of Shares to be issued to Weak Bank
(iii) Prepare Balance Sheet a er merger; and
(iv) Calculate CAR and Gross NPA of Strong Bank a er merger.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

DEMERGER

Ques on 18 Study Material, CA Final Nov 2005

The following informa on is rela ng to Fortune India Ltd. having two division, viz. Pharma Division and Fast
Moving Consumer Goods Division (FMCG Division). Paid up share capital of Fortune India Ltd. is consis ng of
3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd. decided to de-merge Pharma Division as Fortune
Pharma Ltd. w.e.f. 1.4.2023. Details of Fortune India Ltd. as on 31.3.2023 and of Fortune Pharma Ltd. as on
1.4.2023 are given below:
Par culars (`) Fortune Pharma Ltd. (`) Fortune India Ltd.
Outside Liabili es
Secured Loans 400 lakhs 3000 lakhs
Unsecured Loans 2,400 lakhs 800 lakhs
Current Liabili es & Provisions 1,300 lakhs 21,200 lakhs

Assets
Fixed Assets 7,740 lakhs 20,400 lakhs
Investments 7,600 lakhs 12,300 lakhs
Current Assets 8,800 lakhs 30,200 lakhs
Loans & Advances 900 lakhs 7,300 lakhs
Deferred tax / Misc. Expenses 60 lakhs (200) lakhs
BOD of the Company have decided to issue necessary equity shares of Fortune Pharma Ltd. of Re. 1 each,
without any considera ons to the shareholders of Fortune India Ltd.
For that purpose following points are to be considered:
1. Transfer of Liabili es & Assets at Book value.
2. Es mated Profit for the year 2023-24 is ` 11,400 Lakh for Fortune India Ltd. & ` 1,470 lakhs for Fortune
Pharma Ltd.
3. Es mated Market Price of Fortune Pharma Ltd. is ` 24.50 per Share.
4. Average P/E Ra o of FMCG sector is 42 & Pharma sector is 25, which is to be expected for both the
companies.
Calculate:
a) The Ra o in which shares of Fortune Pharma are to be issued to the shareholders of Fortune India Ltd.
b) Expected Market Price of Fortune India Ltd.
c) Book Value per share of both the Companies immediately a er Demerger.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

RESTRUCTURING

Ques on 19 Study Material, CA Final MTP Nov 2018, RTP Nov 2020
The following is the Balance-sheet of XYZ Company Ltd as on March 31 , 2023.
Liabili es Amount Assets Amount
6 lakh equity shares of ` 100/- each 600 Land & Building 200
2 lakh 14% Preference shares of ` 100/- each 200 Plant & Machinery 300
13% Debentures 200 Furniture & Fixtures 50
Debenture Interest accrued and Payable 26 Inventory 150
Loan from Bank 74 Sundry debtors 70
Trade Creditors 300 Cash at Bank 130
Preliminary Expenses 10
Cost of Issue of debentures 5
Profit & Loss A/c 485
1,400 1,400

The XYZ Company did not perform well and has suffered sizable losses during the last few years. However, it is
now felt that the company can be nursed back to health by proper financial restructuring and consequently
the following scheme of reconstruc on has been devised:
(i) Equity shares are to be reduced to ` 25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of ` 50 each,
fully paid up
(iii) Debenture holders have agreed to forego interest accrued to them. Beside this, they have agreed to
accept new debentures carrying a coupon rate of 9%.
(iv) Trade creditors have agreed to forgo 25 per cent of their exis ng claim; for the balance sum they have
agreed to convert their claims into equity shares of ` 25/- each.
(v) In order to make payment for bank loan and augment the working capital, the company issues 6 lakh
equity shares at ` 25/- each; the en re sum is required to be paid on applica on.The exis ng
shareholders have agreed to subscribe to the new issue.
(vi) While Land and Building is to be revalued at ` 250 lakh, Plant & Machinery is to be wri en down to ` 104
lakh. A provision amoun ng to ` 5 lakh is to be made for bad and doub ul debts.
You are required to show the impact of financial restructuring/re-construc on. Also, prepare the new balance
sheet assuming the scheme of re-construc on is implemented in le er and spirit.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

MISCELLANEOUS

Ques on 20 Study Material

Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies are dependent on the
fluctua ng business condi ons. The following informa on is given for the total value (debt + equity) structure
of each of the two companies.
Business Condi on Probability Simple Ltd. ` Lacs Dimple Ltd. ` Lacs
High Growth 0.20 820 1050
Medium Growth 0.60 550 825
Slow Growth 0.20 410 590

The current debt of Dimple Ltd. is ` 65 lacs and of Simple Ltd. is ` 460 lacs.

Calculate the expected value of debt and equity separately for the standalone as well as merged en ty.

[Ans: Simple= Vd = 450, Ve = 126; Dimple = Vd = 65, Ve = 758]

Ques on 21 CA Final May 2003, RTP May 21

Pragya Limited has issued 75,000 equity shares of ` 10 each. The current market price per share is ` 24. The
company has a plan to make a rights issue of one new equity share at a price of ` 16 for every four shares held.

You are required to:

(i) Calculated the theore cal post-rights price per share and analysis the change;
(ii) Calculated the theore cal value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder Mr A, who has 1,000 shares assuming
he sells the en re rights ; and
(iv) Show the effect, if the same shareholder does not take any ac on and ignores the issue.
(v) Suppose Mr A is not interested in subscribing to the right issue, then advice what should he do.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.1. A Ltd. wants to acquire T Ltd……

Solu on:
(i) The number of shares to be issued by A Ltd.:
The Exchange ra o is 0.5
So, new Shares = 1,80,000 x 0.5 = 90,000 shares.

(ii) EPS of A Ltd. A er a acquisi on:

Total Earnings (` 18,00,000 + ` 3,60,000) ` 21,60,000
No. of Shares (6,00,000 + 90,000) 6,90,000
EPS (` 21,60,000)/6,90,000) ` 3.13

(iii) Equivalent EPS of T Ltd.:

No. of new Shares 0.5
EPS ` 3.13
Equivalent EPS (` 3.13 x 0.5) ` 1.565
~ ₹ 1.57

(iv) New Market Price of A Ltd. (PE remains unchanged):

Present PIE Ra o of A Ltd. 10 mes
Expected EPS a er merger ` 3.13
Expected Market Price (` 3.13 x 10) ` 31.30

(v) Market Value of merged firm:

Total number of Shares 6,90,000
Expected Market Price ` 31.30
Total value (6,90,000 x 31.30) ` 2,15,97,000

Q.2. You have been provided the following...

Solu on:
(i) Exchange Ra o 1:1
New Shares to be issued 2,00,000
Total shares of Rama Ltd. (4,00,000 + 2,00,000) 6,00,000
Total earnings (₹ 10,00,000 + ₹ 7,00,000) ₹ 17,00,000
New EPS (₹ 17,00,000/6,00,000) ₹ 2.83

(ii) Exis ng EPS of Rama Ltd. ₹ 2.50

Increase in EPS of Rama Ltd (₹ 2.83 - ₹ 2.50) ₹ 0.33
Exis ng EPS of Krishna Ltd. ₹ 3.50
Decrease in EPS of Krishna Ltd. (₹ 3.50 – ₹ 2.83) ₹ 0.67
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(iii) P/E ra o of new firm (expected to remain same) 14 mes

New market price (14 × ₹ 2.83) ₹ 39.62
Total No. of Shares 6,00,000
Total market Capitaliza on (6,00,000 × ₹ 39.62) ₹ 2,37,72,000
Exis ng market capitaliza on (₹ 70,00,000 + ₹ 1,40,00,000) ₹ 2,10,00,000
Total gain ₹ 27,72,000

(iv)
Rama Ltd. Krishna Ltd Total
No. of shares a er merger 4,00,000 2,00,000 6,00,000
Market price ₹ 39.62 ₹ 39.62 ₹ 39.62
Total Mkt. Values ₹ 1,58,48,000 ₹ 79,24,000 ₹ 2,37,72,000
Exis ng Mkt. values ₹ 1,40,00,000 ₹ 70,00,000 ₹ 2,10,00,000
Gain to share holders ₹ 18,48,000 ₹ 9,24,000 ₹ 27,72,000

or ₹ 27,72,000 ÷ 3 = ₹ 9,24,000 to Krishna Ltd. and ₹ 18,48,000 to Rama Ltd. (in 2:1 ra o)

Q.3. XYZ Ltd., is considering merger with ABC Ltd…..

Solu on:
(i) Pre-merger EPS and P/E ra os of XYZ Ltd. and ABC Ltd.
Par culars XYZ Ltd. ABC Ltd.
Profits a er taxes 5,00,000 1,25,000
Number of shares outstanding 2,50,000 1,25,000
EPS (Earnings a er tax/No. of shares) 2 1
Market price per share 20.00 10.00
P/E Ra o ( mes) 10.00 10.00

(ii) Current market price of ABC Ltd., if P/E ra o is 6.4 = ` 1 × 6.4 = ` 6.4
Exchange ra o = ` 6.4/20 = 0.32
` 5,00,000 + ` 1,25,000 ` 6,25,000
Post - merger EPS of XYZ Ltd. = = = 2.16
2,50,000 + (1,25,000 * 0.32) 2,90,000

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(iii) Calcula on of Gain/ Loss from Merger

Par culars Acquiror Target
Post Merger EPS / Adjusted EPS 2.16 0.6912
[2.16 * 0.32]
Less: Pre-merger EPS 2 1
Gain / (Loss) per Share 0.16 (0.3088)
No. of Shares 250000 125000
Total Gain / (Loss) 40000 (38600)
(iv) Desired exchange ra o
Total number of shares in post-merged company
Post - merger earnings
= = 6,25,000 / 2 = 3,12,500
Pre - merger EPS of XYZ Ltd.
Number of shares required to be issued = 3,12,500 – 250,000 = 62,500
Therefore, the exchange ra o is = 62,500/ 1,25,000 = 0.50
Alterna vely, EPS based swapping will lead to no loss of EPS a er merger.

Q.4. P Ltd. is considering take-over of R Ltd. by the.....

Solu on:
P Ltd. R Ltd.
Profit before Tax (₹ in Crore) 15 13.50
Tax 30% (₹ in crore) 4.50 4.05
Profit a er Tax (₹ in crore) 10.50 9.45
Earning per Share (₹) 10.50 9.45
= ` 0.42 = ` 0.63
25 15
Price of Share before Merger ₹ 0.42 x 12 = ₹ ₹ 0.63 x 9 = ₹ 5.67
(EPS x P/E Ra o) 5.04
(i) ∴Market Value of company
P Ltd. = ₹ 5.04 x 25 Crore = ₹ 126 crore
R Ltd. = ₹ 5.67 x 15 Crore = ₹ 85.05 crore
Combined = ₹ 126 + ₹ 85.05 = ₹ 211.05 Crores
A er Merger
P Ltd. R Ltd.
No. of Shares 25 crores 4
15 x = 12 crores
5
Combined 37 crores
% of Combined Equity 25 12
x 100 = 67.57% x 100 = 32.43%
Owned 37 37
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii)
∴ Value of Original Shareholders

P Ltd. R Ltd.
₹ 211.05 crore x 67.57% ₹ 211.05 crore x 32.43%
= ₹ 142.61 = ₹ 68.44
Alterna vely, it can also be computed as follows:
Combined Value of En ty 211.05 crore
No. of shares a er Merger 37 crore
Value of Per Share ₹ 5.70405
Value of P Ltd. Shareholders (25 crores x ₹ 5.70405) ₹ 142.60 crore
Value of R Ltd. Shareholders (12 crores x ₹ 5.70405) ₹ 68.45 crore

(iii) ∴ Price per Share a er Merger

` 19.95 crore
EPS = = ` 0.539 per share
37 crore
P/E Ra o = 12
Market Value Per Share = ₹ 0.539 x 12 = ₹ 6.47
Total Market Value = ₹ 6.47 x 37 crore = ₹ 239.39 crore
Market Value 239.39 crore
Price of Share = = = ` 6.47
Number of Shares 37 crore

(iv) Effect on Share Price

P Ltd.
Gain/loss (-) per share = ₹ 6.47 - ₹ 5.04 = ₹ 1.43
6.47 - 5.04
ie. x 100 = 0.284 or 28.4%
5.04
∴ Share price would rise by 28.4%
R Ltd.
4
6.47 x = ` 5.18
5
Gain/loss (-) per share = ₹ 5.18 – ₹ 5.67 = (-₹ 0.49)
5.18 - 5.67
ie. x 100 = (-) 0.0864 or (-) 8.64%
5.67
∴ Share Price would decrease by 8.64%.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.5. BA Ltd, and DA Ltd. both the companies operate....

Solu on:
Market price per share (MPS) = EPS X P/E ra o or P/E ra o = MPS/EPS

(i) Determina on of EPS, P/E ra o, ROE and BVPS of BA Ltd. and DA Ltd.
BA Ltd DA Ltd
Earnings A er Tax (EAT) ₹ 2,10,000 ₹ 99,000
No. of Shares (N) 100000 800000
EPS (EAT/N) ₹ 2.10 ₹ 1.2375
Market price per share (MPS) 40 15
P/E Ra o (MPS)(EPS) 19.05 12.12
Equity Funds (EF) ₹ 12,00,000 ₹ 8,00,000
BVPS (EF/N) 12 10
ROE (EAT/EF) X 100 17.50% 12.37 %

(ii) Es ma on of growth rates in EPS for BA Ltd. and DA Ltd.

Reten on Ra o (1-D/P ra o) 0.6 0.4
Growth Rate (ROE × Reten on Ra o) 10.50% 4.95%
(iii) Jus fiable equity shares exchange ra o
(a) Intrinsic value based = ₹ 20 / ₹ 40 = 0.5:1 (upper limit)
(b) Market price based = MPSDA/MPSBA = ₹ 15 / ₹ 40 = 0.375:1 (lower limit)

Since, BA Ltd. has a higher EPS, ROE, P/E ra o and even higher EPS growth expecta ons, the nego able
terms would be expected to be closer to the lower limit, based on the exis ng share prices.

(iv) Calcula on of Post merger EPS and its effects

Par culars BA Ltd. DA Ltd. Combined
EAT (₹) (i) 2,10,000 99,000 3,09,000
Share outstanding (ii) 100000 80000 132000*
EPS (₹) (i)/ (ii) 2.1 1.2375 2.341
EPS Accre on (Dilu on) (Re.) 0.241 (0.301***)

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(v) Es ma on of Post merger Market price and other effects

Par culars BA Ltd. DA Ltd. Combined
EPS (₹) (i) 2.1 1.2375 2.341
P/E Ra o (ii) 19.05 12.12 19.05
MPS (₹) (i)/ (ii) 40 15 44.6
MPS Accre on (₹) 4.6 2.84***
* Shares outstanding (combined) = 100000 shares + (0.40 × 80000) = 132000 shares
** EPS claim per old share = ₹ 2.34 × 0.4 ₹ 0.936
EPS dilu on = ₹ 1.2375 – ₹ 0.936 ₹ 0.3015
***MPS claim per old share (₹ 44.60 × 0.4) ₹ 17.84
Less: MPS per old share ₹ 15.00 ₹ 2.84

Q.6. Given is the following informa on:...

Solu on:
Working Notes:
Day Ltd. Night Ltd.
Net Earnings ` 5 crores ` 3.5 crores
No. of Equity Shares 10,00,000 7,00,000
EPS 50 50
P/E 20 mes 15 mes
MPS ` 1000 ` 750
Market Value 1,00,00,00,000 52,50,00,000
(i) If takeover is funded by Cash
Since Market Price of Night Ltd. reflects its full value, cost of takeover to Day Ltd is
55 crore - 52.50 crore = ` 2.5 crore.
(ii) If the takeover is funded by stock
Number of shares to be issued to Night Ltd.
= ` 55 Crore/ ` 1000 = 5.50 Lakhs
Market Value of Merged Firm = ` 1,00,00,00,000 + ` 52,50,00,000
= ` 1,52,50,00,000 i.e. ` 152.50 Crore
Propor on that Night Ltd.'s shareholders get in Day Ltd.'s Capital Structure will be:

As per ICAI Ideal Solu on

True Cost of Merger = ` 152.50 Crore = ₹ 152.50 Crore x 0.3548 - ₹ 52.5 Crore
x 0.3548 - ` 55 Crore = ₹ 1.607 Crore
= - ` 0.893 Crore
Note: It is students own choice whether he/she wishes to replicate ICAI’S Solu on or the ideal solu on.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Since true cost is nega ve in case of funding from stock, Since true cost is lesser in case of funding from
Day Ltd. would be er off by funding the takeover by stock, Day Ltd. would be be er off by funding the
stock. takeover by stock.

Calcula on of Purchase Price Premium offered:

Purchase Price Premium (in ₹) = Offer Price less Pre-merger MP of Target
= ₹ 55 crores less ₹ 52.5 crores OR ₹ 785.71 - ₹ 750 per share
= 2.5 crores OR ₹ 35.71 per share = ₹ 35.71 per share
Purchase Price Premium (in %) = Offer Price less Pre-merger MP of Target
Pre-merger MP of Target
= ₹ 785.71 - ₹ 750 = 4.76%
₹ 750

Q.7. Elrond Limited plans to acquire….

Solu on:
Shareholders of Doom Ltd. will get 5 lakh share of Elrond Limited, so they will get:

The value of Elrond Ltd. a er merger will be:

= ` 50 x 20 lakh + ` 25 x 10 lakh + ` 200 lakh
= ` 1000 lakh + ` 250 lakh + ` 200 lakh = ` 1450 lakh
True Cost of Merger will be:
(` 1450 x 20%) = ` 290 lakhs – ` 250 lakhs = ` 40 lakhs

Q.8. AFC Ltd. wishes to acquire BCD Ltd...

Solu on:
(i) For BCD Ltd., before acquisi on
The cost of capital of BCD Ltd. may be calculated by using the following formula:
Dividend
+ Growth %
Price
Cost of Capital i.e., Ke = (0.60/20) + 0.07 = 0.10
A er acquisi on g (i.e. growth) becomes 0.08
Therefore, price per share a er acquisi on = 0.60/(0.10 - 0.08) = ₹ 30
The increase in value therefore is = ₹ (30 - 20) x 5,00,000 = ₹ 50,00,000

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii) To share holders of BCD Ltd. the immediate gain is ₹ 100 – ₹ 20 x 4 = ₹ 20 per share
The gain can be higher if price of shares of AFC Ltd. rise following merger which they should undertake.
To AFC Ltd. shareholders ₹ (In lakhs)
Value of Company now 1,000
Value of BCD Ltd. 150
1,150
No. of shares 11.25
∴ Value per share 1150/11.25 = ₹ 102.22
Gain to shareholders of BCD Ltd. = ₹ 102.22 – ₹ (4 x 20) = ₹ 22.22
Gain to shareholders of AFC Ltd. = ₹ 102.22 – ₹ 100.00 = ₹ 2.22

(iii) Gain to shareholders of AFC Ltd:-

Earnings of BCD Ltd. (5,00,000 x 2.50) ₹ 12,50,000
Less: Loss of earning in cash (5,00,000 x ₹ 22 x 0.10 ) ₹ 11,00,000
Net Earning ₹ 1,50,000
Number of shares 10,00,000
Net increase in earning per share 0.15

P/E ra o of AFC Ltd. = 100/8 = 12.50

Therefore, Gain per share of shareholders of AFC Ltd. = 0.15x12.50 = ₹ 1.88
Gain to the shareholders of BCD Ltd. ₹ (22 - 20) = ₹ 2/- per share
Alterna vely, it can also be computed as follows:
Post-Merger Earnings ₹ 81,50,000
(10,00,000 x ₹ 8 + 5,00,000 x ₹ 2.5 – 11,00,000)

EPS a er Merger ( (
81,50,000
10,00,000
₹ 8.15

PE Ra o 12.50
Post Merger Price of Share (₹ 8.15 x 12.50) ₹ 101.875
Less: Price before merger ₹ 100.00
₹ 1.875
Say ₹ 1.88

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Q.9 ICL is proposing to take over SVL with an objec ve....

Solu on:
(i) Computa on of Premium (Net Worth Formula): Amount ₹ in Crores
Total Assets (Fixed assets + Current Assets) = (550 + 580) 1130
Less: Liabili es (Current Liabili es + Borrowings) = (240 + 105) 345
Net Assets Value 785
Current Value of Land a er growing for three years @ 30% = 190 X 2.197 417.43
Less: Book Value 190.00
Increase in the Value of land 227.43
Adjusted NAV (785 + 227.43) 1012.43
Current Profit a er Tax (@15 % for 5 years i.e. 250 X 7.7537 1938.43
Average Profit for 1 year = 1938.43/5 387.69
Total Value of Firm (1012.43 + 387.69) 1400.12
Total Market Value = No of shares X MPS = 12.50 X 75 937.50
Premium (Total Value – Market Value) 462.62
Premium (%) = 462.62/937.50 * 100 49.35%

(ii) Computa on of Premium (Dividend Growth Formula):

Exis ng Growth Rate 0.15
DPS= 125/12.50 10
MPS 75
Cost of Equity (D1/MP + g) = [(10 X 1.15/75) + 0.15] 0.3033
Expected growth rate a er merger 0.18
Expected Market Price = 10 X [1.18 / (0.3033 - 0.18)] 95.70
Premium over current market price (95.70 - 75)/ 75 X 100 27.60%

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Alterna vely, if given figure of dividend is considered as D1 then Premium over Current Market Price shall be
computed as follows:
D1 10 0.2833
Cost of Equity +g + 0.15
P 75
Expected Growth Rate a er Merger 0.18
Expected Market Price 10.00 / (0.2833 – 0.18) 96.81
Premium over Current Market Price (96.81 - 75)/ 75 x 100 29.08%
(iii) During the course of nego a ons, ICL will push forward valua on based on Growth Rate Method as it will
lead to least cash ou low.

Q.10. The following informa on is provided rela ng....

Solu on:
Swap Ra o
Efficient Ltd. Healthy Ltd.
Market capitaliza on 500 lakhs 750 lakhs
No. of shares 10 lakhs 7.5 lakhs
Market Price per share ₹ 50 ₹ 100
P/E ra o 10 5
EPS ₹5 ₹ 20
Profit ₹ 50 lakh ₹ 150 lakh
Share capital ₹ 100 lakh ₹ 75 lakh
Reserves and surplus ₹ 300 lakh ₹ 165 lakh
Total ₹ 400 lakh ₹ 240 lakh
Book Value per share ₹ 40 ₹ 32

(i) Calcula on of Swap Ra o

EPS 1 : 4 i.e. 4.0 x 40% 1.6
Book value 1: 0.8 i.e. 0.8 × 25% 0.2
Market price 1 : 2 i.e. 2.0 × 35% 0.7
Total 2.5

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Swap ra o is for every one share of Healthy Ltd., to issue 2.5 shares of Efficient Ltd. Hence, total no. of shares
to be issued 7.5 lakh × 2.5 = 18.75 lakh shares.

Promoter's holding = 4.75 lakh shares + (5 × 2.5 = 12.5 lakh shares) = 17.25 lakh i.e. Promoter's holding % i s
(17.25 lakh/28.75 lakh) × 100 = 60%.

Calcula on of EPS, Market price, Market capitaliza on and free float market capitaliza on.

(ii) Total No. of shares 10 lakh + 18.75 lakh = 28.75 lakh

Total capital 100 lakh + 187.5 lakh = ₹ 287.5 lakh
Total profit 50 lakh + 150 lakh 200
EPS = = = ₹ 6.956
No. of shares 28.75 lakh 28.75
(iii) Expected market price EPS 6.956 × P/E 10 = ₹ 69.56
Market capitaliza on = ₹ 69.56 per share × 28.75 lakh shares
= ₹ 1,999.85 lakh
(iv) Free float of market capitaliza on = ₹ 69.56 per share × (28.75 lakh × 40%)
= ₹ 799.94 lakh

Q.11. B Ltd. is a highly successful company and....

Solu on:
1. Total market value of C Ltd is = 1,00,000 x ₹ 15 = ₹ 15,00,000
PE ra o (given) = 10
Therefore, earnings = ₹ 15,00,000 / 10
= ₹ 1,50,000
Total market value of B Ltd. is = 5,00,000 x ₹ 12 = ₹ 60,00,000
PE ra o (given) = 17
Therefore, earnings = ₹ 60,00,000/17
= ₹ 3,52,941
The number of shares to be issued by B Ltd.
₹ 15,00,000 ÷ 12 = 1,25,000
Total number of shares of B Ltd = 5,00,000 + 1,25,000 = 6,25,000
The EPS of the new firm is = (₹ 3,52,941 + ₹ 1,50,000) / 6,25,000
= ₹ 0.80
The present EPS of B Ltd is = ₹ 3,52,941 / 5,00,000
= ₹ 0.71
So the EPS of firm B will increase from Re. 0.71 to ₹ 0.80 as a result of merger

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.12. T Ltd. and E Ltd. are in the same industry….

Solu on:
As per T Ltd.'s Offer
` in lakhs

(i) Net considera on Payable

7 mes EBIDAT, i.e. 7× ` 115.71 lakh 809.97
Less : Debt 240.00
569.97
(ii) No. of shares to be issued by T Ltd
` 569.97 lakh/` 220 (rounded off) (Nos.) 2,59,000
(iii) EPS of T Ltd a er acquisi on
Total EBIDT (` 400.86 lakh + ` 115.71 lakh) 516.57
Less : Interest (` 58 lakh + ` 30 lakh) 88.00
428.57
Less : 30% Tax 128.57
Total earnings (NPAT) 300.00
Total no. of shares outstanding (12 lakh + 2.59 lakh) 14.59 lakh
EPS (` 300 lakh/14.59 lakh) ` 20.56

(iv) Expected Market Price:

` in lakhs

Pre-acquisi on P/E mul ple:

EBIDAT 400.86
58.00
342.86
Less: 30% Tax 102.86
240.00

No. of shares (lakhs) 12.00

EPS ` 20.00
220
Hence, PE multiple 11
20
Expected market price a er acquisi on (` 20.56 × 11) ` 226.16

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 MERGERS, ACQUISITIONS & RESTRUCTURING

As per E Ltd's Plan

` in lakhs
(i) Net considera on payable
6 lakhs share × ` 110 660
(ii) No. of shares of be issued by T Ltd
` 660 lakhs ÷ ` 220 3 lakh
(iii) EPS to T Ltd a er Acquisi on
NPAT (as per earlier calcula ons) 300.00
Total no. of shares outstanding (12 lakh + 3 lakhs) 15 lakh
Earning per share (EPS) ` 300 lakh/15 lakh ` 20.00
(iv) Expected Market Price (` 20 × 11) 220.00
(v) Advantages of Acquisi on to T Ltd
Since the two companies are in the same industry, the following advantages could accrue:
• Synergy, cost reduc on and opera ng efficiency.
• Be er market share.
• Avoidance of compe on.
Q.13. Reliable Industries Ltd. (RIL) is considering....

Solu on:
(i) Market value of Companies before Merger
Par culars RIL SIL
EPS `2 `1
P/E Ra o 10 5
Market Price Per Share ₹ 20 ₹5
Equity Shares 10,00,000 10,00,000
Total Market Value 2,00,00,000 50,00,000
(ii) Post Merger Effects on RIL
Par culars ₹
Post merger earnings 30,00,000
Exchange Ra o (1:4)
No. of equity shares o/s (10,00,000 + 2,50,000) 12,50,000
EPS: 30,00,000/12,50,000 2.4
PE Ra o 10.00
Market Value 10 x 2.4 24
Total Value (12,50,000 x 24) 3,00,00,000
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Gains From Merger ₹

Post-Merger Market Value of the Firm 3,00,00,000
Less: Pre-Merger Market Value
RIL 2,00,00,000
SIL 50,00,000 2,50,00,000
Total gains from Merger 50,00,000

Appor onment of Gains between the Shareholders:

Par culars RIL SIL
Post Merger Market Value: ₹ ₹

10,00,000 x 24 2,40,00,000 --
2,50,000 x 24 - 60,00,000
Less: Pre-Merger Market Value 2,00,00,000 50,00,000
Gains from Merger: 40,00,000 10,00,000

Thus, the shareholders of both the companies (RIL + SIL) are be er off than before.

(iii) Post-Merger Earnings:

Increase in Earnings by 20%

New Earnings: ` 30,00,000 + 20% = ` 36,00,000

No. of equity shares outstanding: 12,50,000
EPS: ` 36,00,000/12,50,000 = ` 2.88

PE Ra o = 10
Market Price Per Share:
= ` 2.88 x 10 = ` 28.80

Therefore, Shareholders will be be er-off than before the merger situa on.

Q.14. Longitude Limited is in the process...

Solu on:
(i) Pre-Merger Market Value Per share
PE Ra o x EPS
Longitude Ltd. ` 8 x 15 = ` 120.00
La tude Ltd. ` 5 x 10 = ` 50.00

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii) Maximum exchange ra o without dilu on of EPS

Pre Merger PAT of Longitude Ltd. ` 120 Lakhs

Pre Merger PAT of La tude Ltd. ` 80 Lakhs

Combined PAT ` 200 Lakhs

Longitude Ltd.'s EPS `8

Maximum number of shares of longitude a er merger 25 lakhs

(` 200 lakhs/ ` 8)
Exis ng number of shares 15 lakhs
Maximum number of shares to be exchanged 10 lakhs

Maximum share exchange ra o 10:16 or 5:8

(iii) Maximum exchange ra o without dilu on of Market Price Per share

Pre Merger Market Capitaliza on of Longitude Ltd. ` 1800 lakhs
(` 120 x 15 lakhs)
Pre Merger Market Capitaliza on of La tude Ltd. ` 800 lakhs
(` 50 x 16 lakhs)
Combined Market Capitaliza on ` 2600 lakhs

Current Market Price of shares of Longitude Ltd. ` 120

Maximum number of shares to be exchanged of 21.67 lakhs

Longitude (surviving company) (` 2600 lakhs/ ` 120)
Current Number of Shares of Longitude Ltd. 15.00 Lakhs
Maximum Number of shares to be exchanged (Lakhs) 6.67 Lakhs
Maximum share exchange ra o 6.67:16 or 0.4169:1

Q.15. The equity shares of XYZ Ltd. are....

Solu on:
(a) Calcula on of maximum price per share at which PQR Ltd. can offer to pay for XYZ Ltd's share
Market Value (10,00,000 x ` 24) ` 2,40,00,000

Synergy Gain ` 80,00,000

Saving of Overpayment ` 30,00,000

` 3,50,00,000

Maximum Price (` 3,50,00,000/10,00,000) ` 35

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Alterna vely, it can also be computed as follows:

Let ER be the swap ra o then,
24 x 10,00,000 + 40 x 15,00,000 + 80,00,000 + 30,00,000
40 =
15,00,000 + 10,00,000 x ER
ER = 0.875
40
MP = PE x EPS x ER = x ₹ 4 x 0.875 = ₹ 35
4
(b) Calcula on of minimum price per share at which the management of XYZ Ltd's will be willing to offer their
controlling interest
Value of XYZ Ltd's Management Holding ` 96,00,000
(40% of 10,00,000 x ` 24)
Add: PV of loss of remunera on to top management ` 30,00,000
` 1,26,00,000
No. of Shares 4,00,000
Minimum Price (` 1,26,00,000/4,00,000) ` 31.50

Q.16. The CEO of a company thinks that...

Solu on:
(i)
Acquirer Company Target Company
Net Profit ` 80 lakhs ` 15.75 lakhs
PE Mul ple 10.50 10.00
Market Capitaliza on ` 840 lakhs ` 157.50 lakhs
Market Price ` 42 ` 105
No. of shares 20 lakhs 1.5 lakhs
EPS `4 ` 10.50
Maximum Exchange Ra o 4 : 10.50 or 1 : 2.625
Thus, for every one share of Target Company 2.625 shares of Acquirer Company.

(ii) Let x lakhs be that amount paid by Acquirer company to Target Company. Then to maintain same EPS i.e. ` 4
the number of shares to be issued will be:

X = ` 150 lakhs

Thus, ` 150 lakhs shall be offered in cash to Target Company to maintain same EPS.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.17. During the audit of the Weak Bank (W), RBI....

Solu on:
(i) Swap Ra o

Gross NPA 5:40 5/40 x 30% 0.0375

CAR 5:16 5/16 x 28% 0.0875
Market Price 12:96 12/96 x 32% 0.0400
Book Value Per Share 12:120 12/120 x 10% 0.0100
0.1750

Thus, for every share of Weak Bank, 0.1750 share of Strong Bank shall be issued.
Calcula on of Book Value Per Share
Par culars Weak Bank (W) Strong Bank (S)
Share Capital (` Lakhs) 150 500
Reserves & Surplus (` Lakhs) 80 5,500
230 6,000
Less: Preliminary Expenses (` Lakhs) 50 -
18
Net Worth or Book Value (` Lakhs) 180 6,000
No. of Outstanding Shares (` Lakhs) 15 50
Book Value Per Share (`) 12 120

(ii) No. of equity shares to be issued:

(iii) Balance Sheet a er Merger

Calcula on of Capital Reserve
Book Value of Shares ` 180.00 lac
Less: Value of Shares issued ` 26.25 lac
Capital Reserve ` 153.75 lac

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Balance Sheet

` lac ` lac

Paid up Share Capital 526.25 Cash in Hand & RBI 2900.00

Reserves & Surplus 5500.00 Balance with other banks 2000.00
Capital Reserve 153.75 Investment 20100.00
Deposits 48000.00 Advances 30500.00
Other Liabili es 3390.00 Other Assets 2070.00
57570.00 57570.00

(iv) Calcula on of CAR & Gross NPA % of Bank 'S' a er merger

Weak Bank Strong Bank Merged

5% 16%
Total Capital ` 180 lac ` 6000 lac ` 6180 lac

Risky Weighted Assets ` 3600 lac ` 37500 lac ` 41100 lac

Weak Bank Strong Bank Merged

GNPA (Given) 0.40 0.05

Gross NPA 1400 lakhs 1350 lakhs 2750 lakhs

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.18. The following informa on is rela ng to Fortune India Ltd…..

Solu on:
Share holders' funds
Par culars Fortune India Fortune Pharma Fortune India
Ltd Ltd. (FMCG) Ltd
Assets 70,000 25,100 44,900
Outside liabili es 25,000 4,100 20,900
Net worth 45,000 21,000 24,000

1. Calcula on of Shares of Fortune Pharma Ltd. to be issued to shareholders of Fortune India Ltd.

Fortune Pharma Ltd

Es mated Profit (` in lakhs) 1,470
Es mated market price (`) 24.5
Es mated P/E 25
Es mated EPS (`) 0.98
No. of shares lakhs 1,500
Hence, Ra o is 1 share of Fortune Pharma Ltd. for 2 shares of Fortune India Ltd.
or for 0.5 Share of Fortune Pharma Ltd. for 1 share of Fortune India Ltd.
2. Expected market price of Fortune India (FMCG) Ltd.
Fortune India (FMCG) Ltd.
Es mated Profit (` in lakhs) 11,400
No. of equity share (` in lakhs) 3,000
Es mated EPS (`) 3.8
Es mated P/E 42
Es mated market price (`) 159.60

3. Book value per share

Fortune Pharma Ltd. Fortune India (FMCG) Ltd.
Net worth ( ` in lakhs) 21,000 24,000
No. of shares (` in lakhs) 1,500 3,000
Book value of shares ` 14 `8

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.19. The following is the Balance-sheet of XYZ Company Ltd...

Solu on:
Impact of Financial Restructuring
(i) Benefits to XYZ Ltd.
` in lakhs
(a) Reduc on of liabili es payable
Reduc on in equity share capital (6 lakh shares x ` 75 per share) 450
Reduc on in preference share capital (2 lakh shares x ` 50 per share) 100
Waiver of outstanding debenture Interest 26
Waiver from trade creditors (` 300 lakhs x 0.25) 75
651
(b) Revalua on of Assets
Apprecia on of Land and Building (` 250 lakhs - ` 200 lakhs) 50
701
(ii) Amount of ` 701 lakhs u lized to write off losses, fic ous assets and over- valued assets.
` in lakhs

Wri ng off profit and loss account 485

Cost of issue of debentures 5
Preliminary expenses 10
Provision for bad and doub ul debts 5
Revalua on of Plant and Machinery (` 300 lakhs – ` 104 lakhs) 196
701

Balance sheet of XYZ Ltd as at_______ (a er re-construc on) (₹ in lakhs)

Liabili es Amount Assets Amount

21 lakhs equity shares of ` 25/- each 525 Land & Building 250
2 lakhs 10% Preference shares of ` 50/- each 100 Plant & Machinery 104
9% Debentures 200 Furniture & Fixtures 50
Inventory 150
Sundry debtors 70
-5 65
Cash-at-Bank 206
(Balancing figure)*
825 825

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 MERGERS, ACQUISITIONS & RESTRUCTURING

*Opening Balance of ` 130/- lakhs + Sale proceeds from issue of new equity shares ` 150/- lakhs – Payment of bank
loan of ` 74/- lakhs = ` 206 lakhs.
It is worth men oning that financial restructuring is unique in nature and is company specific. It is carried out, in
prac ce when all shareholders sacrifice and understand that the restructured firm (reflec ng its true value of
assets, capital and other significant financial parameters) can now be nursed back to health. This type of corporate
restructuring helps in the revival of firms that otherwise would have faced closure/liquida on.
Q.20. Simple Ltd. and Dimple Ltd…..
Solu on:
Compute Value of Equity
Simple Ltd. ` in Lacs
High Growth Medium Growth Slow Growth
Debit + Equity 820 550 410
Less: Debt 460 460 460
Equity 360 90 -50
Since the Company has limited liability the value of equity cannot be nega ve therefore the value of equity under
slow growth will be taken as zero because of insolvency risk and the value of debt is taken at 410 lacs. The expected
value of debt and equity can then be calculated as:
Simple Ltd. ` in Lacs
High Growth Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Debt 0.20 460 0.60 460 0.20 410 450
Equity 0.20 360 0.60 90 0.20 0 126
820 550 410 576

Dimple Ltd. ` in Lacs

High Growh Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Equity 0.20 985 0.60 760 0.20 525 758
Debt 0.20 65 0.60 65 0.20 65 65
1050 825 590 823
Simple Ltd. + Dimple Ltd. (Merged Firm) ` in Lacs
High Growh Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Equity 0.20 1345 0.60 850 0.20 475 874
Debt 0.20 525 0.60 525 0.20 525 525
1870 1375 1000 1399

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Expected Values ` in Lacs

Equity Debt
Simple Ltd. 126 Simple Ltd. 450
Dimple Ltd. 758 Dimple Ltd. 65
Merged Firm 874 Merged Firm 525

Tutorial Note: There was a mistake in ICAI’s solu on for this Q., however, in another similar Q, ICAI
has solved the same situa on in correct manner. We have presented the correct solu on for this Q.

Q.21. Pragya Limited has issued 75,000 equity....

Solu on:
(i) Computa on of theore cal post-rights price per share

Where, M = Market price per share (current)

N = Number of exis ng shares required for a rights share
S = Subscrip on price of a rights share
R = Rights share offer (in number)
= [(Rs 24 x 4) + (Rs 16 x 1)]/(4 + 1)
= ` 112/5 ` 22.4

(ii) Computa on of theore cal value of rights alone

= ` 22.4 — ` 16 (Cost of rights share) = ` 6.4

(iii) Impact of rights issue on wealth of the shareholder

Exis ng wealth (1,000 shares x ` 24) ` 24,000
Wealth a er rights issue
Value of shares (1,00 shares x ` 22.4) 22,400
Sale proceeds of rights (1,000 x 1/4 x ` 6.40) 1,600
24,000
Therefore, No change in wealth.
(iv) Impact of rights issue on wealth of shareholder (when shareholder does not take any ac on)
Exis ng wealth (prior to rights issue) ` 24,000
Wealth a er right issue (1,000 shares x ` 22.4) 22,400
Loss of wealth 1,600
(v) If Mr. A is not interested in subscribing to the right issue, he can renounce his right eligibility @ ₹ 6.40 per
right and can earn a gain of ₹ 1600.

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