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Unit : 4
Mergers and Acquisitions

Mergers and acquisitions (M&A) are collaborations between two or more firms. Mergers and
acquisitions are instruments of growth for a company. M&A deals are complex transactions that involve
the transfer of ownership, assets, and liabilities between two or more companies.

Merger:
A merger is a process in which two or more companies come together to form a single entity. The new
entity is often a larger and more diversified organization, with the potential to create synergies and
efficiencies that were not possible before.

Acquisition:
An acquisition is the process by which one company acquires another company. Typically, by buying
a controlling interest in the target company's stock or assets. In an acquisition, the acquiring company
becomes the owner of the target company, which may continue to operate as a subsidiary or be merged
into the acquiring company's operations.

Reason for Mergers & Acquisitions (M&A)

The most common motives for Mergers includes the following:

1. Economies of Scale: An amalgamated company will have more resources at its command than the
individual companies. This will help in increasing the scale of operations and the economies of large
scale will be availed.

2. Operating Economies: A number of operating economies will be available with the merger of two
or more companies. Duplicating facilities in accounting, purchasing, marketing, etc. will be
eliminated.

3. Synergy: Synergy refers to the greater combined value of merged firms than the sum of the values
of individual units. It is something like one plus one more than two.

4. Growth: Merger or amalgamation enables satisfactory and balanced growth of a company. It can
cross many stages of growth at one time through amalgamation. Growth through merger or
amalgamation is also cheaper and less risky.
Example: A number of costs and risks of expansion and taking on new product lines are avoided
by the acquisition of a going concern.

5. Diversification: Two or more companies operating in different lines can diversify their activities
through amalgamation. Since different companies are already dealing in their respective lines there
will be less risk in diversification.

6. Utilisation of Tax Shields: When a company with accumulated losses merges with a profit-making
company, it is able to utilise tax shields.

7. Increase in Value: One of the main reasons of merger or amalgamation is the increase in value of
the merged company. The value of the merged company is greater than the sum of the independent
values of the merged companies. For example, if X Ltd. & Y Ltd. merge and form Z Ltd., the value
of Z Ltd. is expected to be greater than the sum of the independent values of X Ltd. and Y Ltd.
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8. Eliminations of Competition: The merger or amalgamation of two or more companies will
eliminate competition among them. The companies will be able to save their advertising expenses
thus enabling them to reduce their prices.

9. Better Financial Planning: The merged companies will be able to plan their resources in a better
way. The collective finances of merged companies will be more and their utilisation may be better
than in the separate concerns.

10. Economic Necessity: Economic necessity may force the merger of some unis. If there are two sick
units, government may force their merger to improve their financial position and overall working.
A sick unit may be required to merge with a healthy unit to ensure better utilisation of resources,
improve returns and better management. Rehabilitation of sick units is a social necessity because
their closure may result in unemployment etc.

M&A-COMBINATION AND TYPES

Horizontal Merger
Vertical Merger
Merger Conglomenrate Merger Pure
Mixed
Congeneric Merger
Business
Combination Reverse Merger

Friendly Acquisiton
Hostile Takeover
Cash Acquisition
Stock Acquisition

Acquisition Asset Purchase

Leveraged Buyout
Management Buyout
Horizontal Acquisition
Vertical Acquisition
Congeneric Acquisition
Conglomerate Acquisition

[A] Mergers: The type of merger selected by a company primarily depends on the motives and
objectives of the companies participating in a deal. The main types of mergers include:

1. Horizontal Merger: In a horizontal merger, two companies that operate in the same industry and
are typically direct competitors merge to form a single, larger entity. The goal is often to achieve
economies of scale, reduce competition, and increase market share.
Example: Merger between PVR & Inox Leisure, resulting PVR INOX Pictures.

2. Vertical Merger: A vertical merger involves the combination of companies that operate at different
stages of the production or distribution chain. This type of merger aims to streamline operations,
improve efficiency, and reduce costs by integrating various stages of the supply chain. A vertical
merger can harm competition by making it difficult for competitors to gain access to an important
component product or to an important channel of distribution.

3. Conglomerate Merger: Conglomerate mergers involve companies that operate in unrelated

business areas. Unlike horizontal and vertical mergers, where companies are usually in the same or
related industries, a conglomerate merger brings together entities with diverse business interests.
There are two main subtypes of conglomerate mergers: pure conglomerate (financial) merger and
mixed conglomerate merger. There are two subtypes:
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(a) Pure Conglomerate (Financial) Merger:
In a pure conglomerate merger, the participating companies are involved in completely different
industries, and there is no strategic business relationship between them. The primary motivation for
this type of merger is often financial diversification & risk reduction.
Example: A conglomerate that operates in sectors such as technology, healthcare, and entertainment,
with each business unit functioning independently.

(b) Mixed Conglomerate Merger:

In a mixed conglomerate merger, at least one of the participating companies has some strategic
business relationship with the other. This could involve sharing distribution channels, technology, or
other resources. While the companies may still operate in different industries, there is a level of synergy
or connection that makes the merger more strategic than purely financial.
Example: A company in the automotive industry merging with a company in the energy sector to share
research and development capabilities for electric vehicles and sustainable energy solutions.

4. Congeneric Merger: A congeneric merger is a type of merger in which two companies operating in
the same general industry or related industries come together to form a single entity. A congeneric
merger involves businesses that are related but not identical.
Examples: A clothing retailer merging with a footwear manufacturer to offer a broader range of fashion
products.

5. Reverse Merger: The term “reverse” refers to the idea of a private firm acquiring an already public
company, which is the opposite of a typical IPO scenario.

[B] Acquisitions: The type of acquisition chosen depends on the strategic objectives of the acquiring
company. Here are some common types of acquisitions:

1. Friendly Acquisition: In a friendly acquisition, the acquiring company and the target company
engage in negotiations and reach an agreement with the consent of both management teams and
boards of directors. The transaction is mutually agreed upon, and there is a collaborative approach
to the acquisition.

2. Hostile Takeover: In a hostile takeover, the acquiring company pursues the target company without
its consent or against the wishes of the target’s management and board. This can involve direct
communication with shareholders, bypassing the target company’s leadership.
Example: Adani Media Network Ltd. acquisition of NDTV.

3. Cash Acquisition: In a cash acquisition, the acquiring company pays for the target company in cash.
Shareholders of the target company receive a cash payment for their shares, providing immediate
liquidity.

4. Stock Acquisition: In a stock acquisition, the acquiring company offers its own shares as
consideration for acquiring the target company. Shareholders of the target company receive shares
in the acquiring company in exchange for their shares.

5. Asset Purchase: In an asset purchase, the acquiring company buys specific assets and liabilities of
the target company, rather than acquiring the entire business. This type of acquisition allows for
more selective acquisitions and can be advantageous for tax purposes.
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6. Leveraged Buyout (LBO): In a leveraged buyout, a company is acquired using a significant amount
of debt financing. Private equity firms often use LBOs to acquire companies, with the debt being
repaid using the cash flows generated by the acquired business or through the sale of its assets.

7. Management Buyout (MBO): In a management buyout, the existing management team of a

company, often with the support of external investors, acquires the business from its current owners.
This allows the management team to take control of the company.

8. Horizontal Acquisition: In a horizontal acquisition, the acquiring company and the target company
operate in the same industry and offer similar products or services. The goal is often to achieve
economies of scale, increase market share, and eliminate competition.

9. Vertical Acquisition: In a vertical acquisition, the acquiring company and the target company
operate at different stages of the production or distribution chain. This type of acquisition aims to
streamline operations, improve efficiency, and gain control over the supply chain.

10. Congeneric Acquisition: In a congeneric acquisition, the acquiring and target companies are in
related industries, sharing some commonalities in terms of products, services, or markets. While not
direct competitors, they may have complementary offerings.

11. Conglomerate Acquisition: In a conglomerate acquisition, the acquiring and target companies
operate in entirely different and unrelated industries. The goal is often diversification and risk
reduction by entering new and distinct markets.

BENEFITS AND MOTIVES OF M&A

Mergers and acquisitions (M&A) can offer various strategic and financial benefits to companies,
provided they are well-planned and executed. Here are some common benefits associated with M&A

1. Market Expansion: M&A allows companies to enter new geographic markets, reach untapped
customer segments, and expand their overall market presence.

2. Diversification: M&A enables companies to diversify their product or service offerings. customer
base, and geographic exposure, reducing dependence on a single market or product.

3. Increased Market Share: Acquiring companies can gain a larger market share, consolidating their
position in the industry and potentially gaining a competitive edge.

4. Economies of Scale: Merging companies often benefit from economies of scale, leading to lower
per-unit costs, improved operational efficiency, and enhanced profitability.

5. Access to New Technologies and Expertise: M&A can provide access to new technologies, research
and development capabilities, and specialized expertise that the acquiring company may lack.

6. Enhanced Talent Pool: Acquiring companies may gain access to a skilled workforce, key personnel,
and managerial talent from the target company, contributing to the overall capabilities of the combined
entity.

7. Financial Performance Improvement: M&A transactions can lead to improved financial metrics,
including increased revenue, profitability, and return on investment.
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8. Increased Bargaining Power: Merging companies may gain increased bargaining power in
negotiations with suppliers, customers, and other stakeholders.

9. Access to Capital: Publicly traded companies resulting from M&A transactions may have enhanced
access to capital through secondary offerings or other financial instruments.

10. Competitive Advantage: M&A can enhance a company's competitive position by combining
resources, capabilities, and market presence, making it more resilient and adaptable to industry
changes.

MERGER NEGOTIATIONS
Merger negotiations involve complex discussions and negotiations between the acquiring and target
companies to reach an agreement on the terms and conditions of the merger. Effective negotiation
strategies are crucial for ensuring that the interests of both parties are addressed, and a mutually
beneficial deal is achieved. Here are key considerations and steps involved in merger negotiations:

1. Strategic Alignment: Successful mergers and acquisitions rely heavily on the alignment of cultural,
organisational, and strategic elements to foster long-term success.

2. Confidentiality Agreement: Before detailed negotiations begin, sign a confidentiality agreement to

protect sensitive information and maintain confidentiality throughout the negotiation process.

3. Preliminary Discussions: Engage in preliminary discussions to gauge interest and explore the
possibility of a merger. Initial talks may involve high-level considerations such as strategic fit,
valuation, and potential synergies.

4. Due Diligence: Due diligence is a critical investigative tool that uncovers hidden risks and potential
pitfalls. The importance of due diligence in mergers and acquisitions is that it helps you avoid the risk
of costly errors and financial losses.

5. Valuation: Financial valuation is integral to M&A transactions as it helps determine a fair value for
the companies involved. It involves determining the worth of a target company and evaluating its
financial performance, assets, liabilities, and future earnings potential.

6. Letter of Intent (LOI): Once there is mutual interest, the parties may enter into a non-binding Letter
of Intent. The LOI outlines the key terms and conditions of the proposed merger, serving as a
framework for more detailed negotiations. Assemble negotiation teams representing both companies.
Include professionals from various disciplines, such as finance, legal, operations, and human resources.

7. Deal Structure & Terms: Discuss and agree on the structure of the deal, including whether it will
be a stock or asset acquisition, the form of consideration (cash, stock, or a combination). and other
transaction details. Negotiate the specific terms and conditions of the merger agreement. This includes
matters such as purchase price, payment terms, due diligence findings, and any contingencies.

8. Regulatory Approvals: Address regulatory considerations and approvals required for the merger.
Antitrust and competition authorities may need to review and approve the transaction.

9. Integration Planning: Begin discussing post-merger integration plans. Address how the combined
entity will operate, synergies to be realized, and potential challenges in merging the two organizations.
Discuss how the merger will impact employees, including potential layoffs, retention plans, and
strategies for addressing cultural differences between the two organizations.
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10. Legal Documentation: Draft the definitive legal documents, including the merger agreement. This
document outlines the terms of the deal, responsibilities of each party, and the legal framework for
completing the transaction.

11. Final Agreement: Reach a final agreement on all terms and conditions. Once all parties are
satisfied, sign the definitive merger agreement.

12. Shareholder Approval: Obtain necessary approvals from the boards of directors and shareholders
of both companies. Compliance with regulatory requirements and obtaining shareholder support are
critical steps.

13. Closing: Complete the closing of the transaction, which involves fulfilling all conditions precedent
outlined in the merger agreement. Transfer of ownership and operational control occurs at this stage.
Implement the post-merger integration plan, addressing operational, cultural, and employee-related
aspects. Monitor the success of integration efforts and adjust strategies as needed.

LEVERAGE AND MANAGEMENT BUYOUT

[A] Leveraged Buyout (LBO): It is a financial transaction in which a company is acquired using a
significant amount of borrowed funds. The acquired company's assets, and often the assets of the
acquiring company itself, are used as collateral for the borrowed funds. The key features of a Leveraged
Buyout include:

1. Use of Debt: LBOs rely heavily on borrowed funds, often comprising a large portion of the purchase
price. The debt is used to finance the acquisition, and the assets of the acquired company and sometimes
the acquiring company are used as collateral.

2. Financial Structure: The debt-to-equity ratio in an LBO is typically high, indicating that a large
proportion of the acquisition is funded through debt. This allows the acquirer to amplify returns if the
investment performs well.

3. Equity Contribution: The buyer’s equity contribution is relatively small compared to the total
purchase price. The goal is to maximize the use of leverage to achieve higher returns on equity.

4. Target Companies: LBOs are often used to acquire private companies. The private nature of the
target company may limit the ability of public investors to participate in the acquisition.

5. Management Participation: Managers may invest their own money alongside the private equity
firm and often receive equity stakes in the newly acquired company.

6. Exit Strategy: Exit through Sale or IPO. Private equity firms, which typically lead LBG
transactions, plan for an exit strategy. This may involve selling the company to another buyer, taking
the company public through an initial public offering (IPO), or other means.

7. Risk and Return: LBOs involve a higher level of financial risk due to the significant use of debt.
However, if the acquired company performs well, the returns for the equity investors can be substantial.

LBOs are complex transactions that involve a combination of financial engineering, strategic planning,
and operational improvements. The success of an LBO often depends on the ability to generate
operational efficiencies, increase the company’s value, and successfully manage the debt structure.
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[B] Management Buyout (MBO): It is a transaction in which the existing management team of a
company acquires a significant ownership stake or full ownership of the business from its current
owners. MBOs are often facilitated by the management team, with the support of external investors,
such as private equity firms or lenders. Here are the key features of a Management Buyout:

1. Existing Management Team: The current management team, often including executives and key
employees, plays a central role in the MBO. They lead the effort to acquire the business in which they
are currently employed.

2. Change in Ownership: The MBO results in a change in ownership structure, with the management
team acquiring a significant stake or full ownership of the company. This transition may involve
purchasing the business from the current owners, such as the founders or existing shareholders.

3. Management Equity Contribution: Members of the management team typically invest their own
capital as part of the acquisition, aligning their interests with the success and performance of the
business.

4. Support from External Investors: While the management team contributes equity external
investors, such as private equity firms or lenders, often provide additional financing to facilitate the
acquisition. This external funding helps bridge the gap between the equity contribution from
management and the total purchase price.

5. Thorough Investigation: The management team conducts due diligence to thoroughly assess the
company's financial health, operational performance, and any potential risks or challenges. Due
diligence helps in making informed decisions about the acquisition.

6. Deal Negotiation: The management team negotiates the terms of the acquisition with the current
owners and potential external investors. This negotiation includes discussions on the purchase price,
financing terms, and other deal-related considerations.

7. Performance Incentives: MBOs often include performance incentives for the management team.
These incentives may be in the form of additional equity or bonuses tied to the company's future
performance and growth. The existing management team typically continues to lead the company post-
acquisition. This continuity helps maintain operational stability and ensures a smooth transition.

8. Debt and Equity Mix: The funding structure of an MBO typically includes a combination of debt
and equity. The mix is designed to optimize the financial structure and enhance returns for the
management team and external investors.

9. Adherence to Regulations: MBO transactions must adhere to legal and regulatory requirements.
This includes compliance with securities regulations, corporate governance rules, and any other
relevant laws.

10. Integration and Growth: The management team, with the support of external investors, develops
plans for post-acquisition integration, operational improvements, and growth strategies. These plans
aim to enhance the value of the business.

Management Buyouts are often pursued when the existing management team believes they can drive
the company's success and create value through ownership.
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SIGNIFICANCE OF P/E RATIO IN M&A:
The Price-to-Earnings (P/E) ratio is a commonly used financial metric in mergers and acquisitions
(M&A) to assess the relative valuation of a company. The P/E ratio is calculated by dividing the market
price per share of a company by its earnings per share (EPS). It is an indicator of how much investors
are willing to pay for each rupee of earnings generated by the company.

For Sellers:
1. Company Valuation: Sellers often use the P/E ratio as a benchmark to assess the market value of
their company. The ratio provides a quick snapshot of how the market values the company's earnings.

2. Negotiation Tool: Sellers may use their current P/E ratio as a negotiation tool during M&A
discussions. If the company has a higher-than-average P/E ratio compared to industry peers, it might
argue for a premium valuation.

3. Comparable Company Analysis (CCA): In the process of valuing their company, sellers may look
at P/E ratios of comparable publicly traded companies as part of a Comparable Company Analysis
(CCA). This analysis helps in determining an appropriate valuation multiple for their own company.

For Buyers:
1. Valuation Comparison: Buyers may use the P/E ratio as one of several valuation metrics to compare
potential target companies. It helps in assessing the relative valuation of different acquisition targets.

2. Benchmarking: Buyers may compare the P/E ratios of target companies to industry averages or the
buyer's own P/E ratio. This benchmarking helps in understanding how the acquisition fits into the
buyer's overall portfolio and whether it is accretive or dilutive to earnings.

3. Due Diligence: During due diligence, buyers may analyse the historical trends of the target’s P/E
ratio. Understanding the variations in the P/E ratio over time can provide insights into the company's
historical performance and market sentiment.

4. Synergy Assessment: Buyers may evaluate the potential impact of the acquisition on the combined
entity’s P/E ratio. If the acquisition is expected to result in cost synergies or revenue enhancements, it
may positively influence the P/E ratio of the combined entity.

5. Deal Structure: The P/E ratio can influence the deal structure. If the buyer's P/E ratio is high, it may
be advantageous to use stock as part of the consideration, potentially offering a premium to the target's
shareholders.

6. Integration Planning: Understanding the P/E ratio of both the buyer and the target is crucial for
integration planning. It helps in aligning financial expectations, setting performance targets, and
communicating the value proposition to stakeholders.

In summary, the P/E ratio is a versatile tool in M&A, providing valuable insights into the relative
valuation of companies. However, it is important to consider the broader context, industry dynamics,
and the specific circumstances of the acquisition when using the P/E ratio for valuation purposes.
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FINANCIAL VALUATION IN MERGERS AND ACQUISITIONS
Financial valuation plays a pivotal role in mergers and acquisitions (M&A). Here are key steps and
considerations for the financial evaluation of a merger:

1. Assessing Financial Health: By analysing the target company’s historical financial performance.
Company can evaluate the financial value of a target company & financial well-being. This
assessment plays an important role in understanding the economic opportunities and risks linked
with the acquisition.

2. Pricing and Negotiating: Pricing and negotiating in mergers and acquisitions (M&A) involve
determining the fair value of the target company, structuring the deal terms, and navigating through
negotiations to reach a mutually beneficial agreement. It employs various valuation methodologies
to determine a justifiable fee based on economic forecasts, market comparable, and other relevant
factors. Obtaining favourable valuations is critical to negotiating good terms and conditions in an
M&A transaction.

3. Deal Structure: The deal structure in mergers and acquisitions (M&A) refers to how the transaction
is arranged and the terms under which the acquiring company will take ownership of the target
company. The structure of the deal has significant implications for both the buyer and the seller,
impacting issues such as taxation, control, and the allocation of risks and benefits. Evaluate different
deal structures, such as cash transactions, stock transactions, or a combination of both. The chosen
structure can impact the overall pricing and the perceived value to shareholders.

4. Cost of Capital: Calculate the weighted average cost of capital (WACC) for the combined entity.
WACC is used to discount future cash flows in the valuation process and is an important metric for
assessing the financial attractiveness of the merger.

5. Financial Modelling: Financial modelling in mergers and acquisitions (M&A) involves creating a
detailed representation of the financial aspects of a potential or completed transaction. Financial
models serve as tools for analysing, evaluating, and making informed decisions about the financial
implications of an M&A deal. Develop financial models to project the impact of the acquisition on
the financial performance of the combined entity. This helps in assessing the value creation potential
and justifying the proposed pricing.

APPROACHES AND METHODS OF FINANCIAL VALUATION IN MERGERS AND

ACQUISITIONS
There are various approaches and methods are employed to assess the value of a target company. Here
are the primary approaches and methods of financial valuation in M&A:
1. Income Approach, 2. Market Approach & 3. Asset Approach.

1. Income Approach:
The Income approach is a general way of determining the value of a business by converting anticipated
economic benefits into a present single amount. The income-based valuation method focuses on the
target company's ability to generate future cash flows and assesses the present value of these cash
flows. The most common way of doing this is by using the discounted cash flow method.

✓ Discounted Cash Flow (DCF) Analysis:

The discounted cash flow approach is an intrinsic value approach that determines the value of the
company by computing the present value of cash flows over the life of the company.
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2. Market Approach:
The market approach involves comparing the actual sales of similar businesses within a relevant
timeframe. This is where one compares a business to publicly held firms whose stock is trading. A
value is derived by examining the public firm's EV/EBITDA or EV/Revenue multiples and applying a
similar multiple to the non-public, target firm. It includes
(a) Comparable Company Analysis & (b) Precedent Transactions.

3. Asset Approach:
The underlying asset approach is a technique in which the assets of the business determine how much
it is worth. The assets being valued are both tangible and intangible which means they are considered
in the valuation regardless of whether or not they show up on the balance sheet. The final value of the
business is determined by a simple formula:
Assets – Liabilities (Incl. Pref. share) = Value of the Business.

ILLUSTRATION:
1. A Ltd. wants to take over B Ltd. & the financial details of both the companies are as below:
Particular A Ltd. B Ltd.
Equity Share Capital of ₹ 10 each 2,00,000 1,00,000
Preference Share Capital 40,000 ------
Share Premium ------- 4,000
Profit & Loss Account 76,000 8,000
10% Debenture 30,000 10,000
Total Liabilities 3,46,000 1,22,000
Fixed Assets 2,44,000 70,000
Current Assets 1,02,000 52,000
Total Assets 3,46,000 1,22,000
Profit after tax & preference dividend 48,000 30,000
Market price per share 24 27
You are required to determine the share exchange ratio to be offered to the shareholders of B Ltd.
based on: i. Net Assets value, ii. EPS, & iii. Market price. Which should be preferred from the point
view of A Ltd.

2. Company P wishes to takeover company Q. The details are as follows:

Particular Company X ₹ Company Z ₹
Equity shares (₹ 100 per share) 22,00,000 5,00,000
Share premium A/c 20,000 30,000
Profit & Loss A/c 28,000 14,000
Preference Share 25,000 15,000
8% Debentures 10,000 10,000
Fixed Assets 11,52,000 3,35,000
Net Current Assets 1,01,000 46,000
PAT for share holders 66,000 26,000
Market price / Equity shares 33 23
Price Earnings Ratio 15 10
What offer do you think company P could make to company Q in terms of Exchange ratio, based
on following methods: a. Net Assets Value, b. Earning per share, c. Market price per share.
Which method would you prefer from P’s point of view?

3. Aditya Holdings, a telecom services giant, was looking to diversify it portfolio & expand its
operations globally. On the other hand, Birla a leading player in the technology sector, had been
facing increasing competition & market saturation. Recognizing the synergies between their
respective business, the leadership teams of both companies-initiated discussions regarding a
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potential acquisition (by way of merger) of the firms. The following data are available in respect of
both the companies.
Company PAT No. of Eq. Share Market value per share
Aditya 4,00,000 80,000 15
Birla 1,20,000 20,000 12
a. What shall be the earning per share for Aditya, if the proposed merger takes place by exchange of
equity share & the exchange ratio is based on the current market price?
b. Birla wants to be sure that earnings available to its shareholders will not be diminished by the
merger, what should be the exchange ratio in that case?

Conclusion: Total earnings available to shareholders of Birla after merger will be 24,000 share x ₹ 5
= ₹ 1,20,000. Therefore, exchange ratio based on EPS is recommended.

4. The merger between Alpha Pharmaceuticals, a leading pharmaceutical co., of India & Beta Biotech,
a prominent biotechnology firm HQ in Bengaluru, exemplifies the complexities & opportunities
inherent in merger.
Particular Alpha Beta
Earnings after tax ₹ 80,00,000 24,00,000
No. of Equity Share 16,00,000 4,00,000
Market value per share ₹ 200 160
a. If the merger goes through by Exchange of equity & the exchange ratio based on the current
market price, what is the new EPS for Alpha.
b. Beta wants to be sure that earnings available to its shareholders will not be diminished by the
merger, what should be the exchange ratio in that case?

Conclusion: The exchange ratio (6 for 5) based on market shares is beneficial to shareholders of Beta.