Mergers, Acquisition and Corporate Restructuring
Problems and Solutions on Exchange Ratio
Exercise 1: Exchange Ratio Saviruchi Ltd (has 200000 shares outstanding) wants to acquire Durgabhavan Ltd(has 100000 shares outstanding), by exchanging its 1.6 shares for every share of Durgabhavan Ltd. Calculate the post-merger number of shares Solution: New Shares to be issued to Target = Exchange Ratio X Existing No. of shares of Target New shares to be issued to Durgabhavan Durgabhavan = 1.6 X 100000 = 160000 Existing Shares of Saviruchi = 200000 Post-Merger Number of Shares Shares = 200000 + 160000 = 360000
Exercise 2: Exchange Ratio Kelloggs Ltd is taking over Corn Flakes Ltd. The shareholders of Corn Flakes Ltd would receive 0.8 share of Kelloggs Ltd for each share held by them. No. of shares of Kelloggs Ltd before Merger is 250000 and No. of shares of Corn Flakes Ltd pre-merger is 175000. Calculate the post-merger no. of shares Solution: New shares to be issued to Corn Flakes = 0.8 X 175000 = 140000 Existing Shares of Kelloggs = 250000 Post-Merger Number of Shares Shares = 250000 + 140000 = 390000
Exercise 3: Exchange Ratio Mylari Company is acquiring Harihara Company. Mylari will pay 0.5 of its shares to the shareholders of Harihara for each share held by them. Existing no. of Shares of Mylari is 500 Million and that of Harihara Co. is 250 Million. Calculate the post-merger number of shares Solution: New shares to be issued to Harihara = 0.5 X 250 = 125 Mn Existing Shares of Mylari = 500 Mn Post-Merger Number of Shares Shares = 500 + 125 = 625 Mn
Exercise 4: Exchange Ratio Rice Ltd acquires Wheat Ltd by exchanging one share for every two shares of Wheat Ltd. Calculate the post-merger post-merger number of shares shares of Rice Ltd. Outstanding, if pre-merger pre-merger number of shares were as below:
Rice Ltd – Ltd – 1000 1000
Wheat Ltd – Ltd – 400 400
Solution: New shares to be issued to Wheat = 0.5 X 400 = 200 Existing Shares of Rice = 1000 Post-Merger Number of Shares Shares = 1000 + 200 = 1200 KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring
Problems and Solutions on Exchange Ratio
Exercise 5: Exchange Ratio Based on the information given below ascertain the exchange ratio based on Net A ssets Value:
Total Assets External Liabilities
Slice Ltd (Acquirer) (Acquirer)
Maaza Ltd (Target)
1000 Lacs
500 Lacs
400 Lacs
200 Lacs
Solution: Net Assets = Total Assets – Assets – Liabilities Liabilities Net Assets of Slice Ltd = 1000 – 1000 – 400 400 = 600 Lacs Net Assets of Maaza Ltd = 500 – 500 – 200 200 = 300 Lacs Net Assets Ratio
= Net Assets of Target Co./Net Assets of Acquiring Co. = 300/600 = 0.5
Exchange Ratio
= 0.5:1
i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd
Exercise 6: Exchange Ratio Based on the information given below determine the exchange ratio based on Net Assets Value: Torino Ltd (Acquirer) (Acquirer) Citra Ltd (Target) (Target) Fixed Assets
150
100
Current Assets
100
50
13% Debentures
100
40
Creditors
100
10
Solution: Net Assets = Total Assets – Assets – Liabilities Liabilities Net Assets of Torino Ltd = (150+100) – (150+100) – (100+100) (100+100) = 50 Lacs Net Assets of Maaza Ltd = (100+50) – (100+50) – (40+10) (40+10) = 100 Lacs Net Assets Ratio
= Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2
Exchange Ratio
= 2:1
i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd
Exercise 7: Exchange Ratio Determine the exchange ratio in case of below Merger, based on EPS proportion: Fanta Ltd(Acquirer) EPS
Sprite Ltd(Target)
Rs. 100
Rs.50
Solution Exchange Ratio based on EPS proportion
= EPS of Target Co / EPS of Acquiring Co
Exchange Ratio based on EPS proportion
= 50 / 100 = 0.5
Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring
Problems and Solutions on Exchange Ratio
Exercise 8: Exchange Ratio Determine the exchange ratio in case of below Merger, based on EPS p roportion: Thumsup Ltd(Acquirer) PAT
Mountaindew Ltd(Target)
Rs. 6700000
Rs. 5450000
No. of shares 100000
50000
Solution EPS = Profit after Tax / No. of Shares EPS of Thumsup Ltd = 6700000 / 100000 = Rs. 67 EPS of Mountaindew Ltd = 5450000 / 50000 = Rs. 109 Exchange Ratio based on EPS proportion
= 109 / 67 = 1.63
Shareholders of Mountaindew will get 1.63 share of Thumsup for every share held in Mountaindew
Exercise 9: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Market Price of Dominos Ltd (Acquiring Co) – Rs. 83 Market Price of Pizza Hut Ltd ( Target Co) – Rs. 44 Solution Exchange Ratio based on Market Price = Market Price of Target / Market Price of Acquiring Exchange Ratio based on Market Price
= 44 / 83 = 0.53
Shareholders of Pizza Hut will get 0.53 sh are of Dominos Ltd for every share held in Pizza Hut
Exercise 10: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Dosa Ltd(Acquirer) P/E Ratio
5 Times
Profit after Tax
Rs. 20 Lacs
No. of Shares
100000
Idli Ltd(Target) 10 Times Rs. 1250000 50000
Solution Market Price = P/E Ratio X EPS Market Price = P/E Ratio X (Profit after Tax/No. of Shares) Market Price of Dosa Ltd (Acquiring Co) – 5 X (2000000/100000) = 5 X 20 = 100 Market Price of Pizza Hut Ltd (Target Co) – 10 X (1250000/50000) = 10 X 25 = 250 Exchange Ratio based on Market Price = 250 / 100 = 2.5 Shareholders of Idli will get 2.5 share of Dosa Ltd for every share held in Idli
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring
Problems and Solutions on Exchange Ratio
Exercise – 11: Exchange Ratio (VTU, MBA, June-2010, 10 Marks) Shanthisagar Ltd wishes to takeover Maheshprasad Ltd. The financial details of the two companies are as under: Particulars
Shanthisagar
Maheshprasad
Equity Shares (Rs. 10 per share) Share Premium Account
100000
50000 2000
Profit and Loss Account Preference Shares
38000 20000
4000
10% Debentures Total
15000 173000
5000 61000
Fixed Assets
122000
35000
Net Current Assets
51000
26000
Maintainable Annual Profit After Tax For Equity Shareholders
24000
15000
24 10
27 9
Market Price per Equity Share Price Earnings Ratio
What offer do you think Shanthisagar Ltd could make to Maheshprasad Ltd in terms of exchange ratio, based on (i)Net Assets Value (ii)Earnings Per Share (iii) Which method would you prefer from Shanthisagar Ltd’s point of view? Solution i) Exchange Ratio based on Net Assets Value Shanthisagar
Maheshprasad
Fixed Assets
122000
35000
Net Current Assets
51000
26000
173000
61000
Less: 10% Debentures
15000
5000
Less: Preference Shares
20000
Net Assets
138000
56000
No. of Shares
10000
5000
Net Assets per share
13.8
11.2
Total Assets
Exchange Ratio based on Net Assets = 11.2/13.8 = 0.81 ii) Exchange Ratio based on EPS Profit
24000
15000
No. of Shares
10000
5000
Earnings per share
2.4
3
Exchange Ratio based on EPS = 3/2.4 = 1.25 iii) Exchange Ratio based on Market Price per share Market Price
24
27
Exchange Ratio based on MPS = 27/24 = 1.125 KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Market Price?
Mergers, Acquisition and Corporate Restructuring
Problems and Solutions on Exchange Ratio
Exercise 12: Exchange Ratio (VTU, MBA, Jul-2009, 3 Marks) Nandini Ltd is considering the acquisition of Heritage Ltd with stock. Relevant financial information is as below: Particulars
Nandini Ltd
Heritage Ltd
Present Earnings (in thousands)
Rs. 4000
Rs. 1000
Common Shares (in thousands)
2000
800
Earnings Per Share
Rs. 2
Rs. 1.25
12
8
Price/Earnings Ratio
Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd. i)
What is the ratio of exchange of stock?
ii)
How many new shares will be issued?
Solution Nandini
Heritage
2000
800
P/E Ratio = Market Price / EPS
12 = x/2
8 = x/1.25
Solving for x, we get
24
10
No. of shares (using EPS) Finding out Market Price through P/E ratio formula
Market Price as
Exchange Ratio = (10 X 1.2) / 24 = 12/24 = 1.5 No. of new shares to be issued = 1.5 X 800 = 1200
Exercise 13: EPS Management Based on the below data, calculate Pre -Merger EPS for both companies and Post-Merger EPS of Acquiring Company Exchange Ratio – 0.5 shares of acquiring company – Iyangars Ltd to be given to shareholders of Target Company – SLV Ltd for every one share of SLV Ltd held by them Profit after Tax of Iyangars – Rs. 2500000 Profit after Tax of SLV Ltd – Rs. 4500000 No. of outstanding equity shares of Iyangars Ltd – 250000 No. of outstanding equity shares of SLV Ltd – 180000 Solution EPS = PAT / No. Of shares Pre-Merger EPS of Iyangars Ltd = 2500000 / 250000 = Rs. 10 Pre-Merger EPS of SLV Ltd 4500000/180000 = Rs. 25 Post-Merger PAT = (2500000+4500000) = 7000000 Post-Merger No. of Shares = 250000 + (180000 X 0.5) = 250000 + 90000 = 340000 Post-Merger EPS = 7000000/340000 = Rs. 20.58 KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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