CA.CS.CMA.MBA: Naveen.

Rohatgi MERGER AND ACQUISITION

NUMERICALS ON MERGER AND ACQUISITION

Illustration 1 : Company X is contemplating to purchase Company Y. Company X has 3,00,000

shares having a market price of Rs. 30 per share while company Y has 2,00,000 shares selling at Rs.
20 per share. The EPS are Rs. 4 and Rs. 2.25 for X and Y Respectively.
Management of both the companies are discussing proposal for exchange of share in proportion to the
relative earning per share of two companies.
Calculate EPS after merger if implemented.

Illustration 2: XYZ Ltd. is planning to acquire PQR Ltd. since the current EPS is Rs. 5 for the XYZ
Company, the management is keen to get EPS of Rs. 6 at least post merger. They seek your advice on the
possible exchange ratio that would give the merged entity an EPS of s. 6. it is also provided that the
acquisition would result in a synergy of 200 lakh. The following financial data is given.

Particulars XYZ Ltd. PQR Ltd.

EPS Rs. 5 Rs. 4
No. of shares 200 Lakhs 80 Lakh
Market Price Rs. 100 Rs. 70.

Illustration 3
A Ltd. is studying the possible acquisition of B Ltd. by way of merger. The following data are available:
Firm After-tax earnings No. of equity shares Market price per share
A Ltd. ` 10,00,000 2,00,000 ` 75
B Ltd. ` 3,00,000 50,000 ` 60
(i) If the merger goes through by exchange of equity shares and the exchange ratio is set
according to the current market prices, what is the new earnings per share for A Ltd.
(ii) B Ltd. wants to be sure that its earning per share is not diminished by the merger. What
exchange ratio is relevant to achieve the objective?
Illustration 4
1. 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 ratio of 17. The Board of Directors of
B Ltd. has been advised that if it were to take over firms with a lower PE ratio than it own, using a
share-for-share exchange, then it could increase its reported earnings per share. C Ltd. has been
suggested as a possible target for a takeover, which has a PE ratio 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 `
1
 CA.CS.CMA.MBA: Naveen. Rohatgi MERGER AND ACQUISITION

12.
Calculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. by issuing
shares at its market price of `12. Assume the price of B Ltd. shares remains constant.
Illustration 5
MK Ltd. is considering acquiring NN Ltd. The following information is available:

Company Earning after No. of Equity Market Value

Tax (`) Shares Per Share (`)
MK Ltd. 60,00,000 12,00,000 200.00
NN Ltd. 18,00,000 3,00,000 160.00
Exchange of equity shares for acquisition is based on current market value as above. There is no
synergy advantage available.
(i) Find the earning per share for company MK Ltd. after merger, and
(ii) Find the exchange ratio so that shareholders of NN Ltd. would not be at a loss.

Illustration 6
ABC Ltd. is intending to acquire XYZ Ltd. by merger and the following information is available in respect of
the companies:

ABC Ltd. XYZ Ltd.

Number of equity shares 10,00,000 6,00,000
Earnings after tax (`) 50,00,000 18,00,000
Market value per share (`) 42 28

Required:
(i) What is the present EPS of both the companies?
(ii) If the proposed merger takes place, what would be the new earning per
share for ABC Ltd.? Assume that the merger takes place by exchange of
equity shares and the exchange ratio is based on the current market
price.
(iii) What should be exchange ratio, if XYZ Ltd. wants to ensure the earnings
to members are same as before the merger takes place?

2
 CA.CS.CMA.MBA: Naveen. Rohatgi MERGER AND ACQUISITION

Illustration 7
A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of
T Ltd.). Following information is provided:

A Ltd. T. Ltd.
Profit after tax `18,00,000 `3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS `3 `2
PE Ratio 10 times 7 times
Market price per share `30 `14

Required:
(i) The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
(ii) What is the EPS of A Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of T Ltd.
(iv) What is the expected market price per share of A Ltd. after
the acquisition, assuming its PE multiple remains
unchanged?
(v) Determine the market value of the merged firm.
Illustration 8
The following information is provided related to the acquiring Firm Mark Limited and the
target Firm Mask Limited:

Firm Firm
Mark Limited Mask Limited
Earning after tax (`) 2,000 lakhs 400 lakhs
Number of shares outstanding 200 lakhs 100 lakhs
P/E ratio (times) 10 5

Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark
Limited after acquisition, assuming P/E ratio of Mark
Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent
companies after acquisition.

3
 CA.CS.CMA.MBA: Naveen. Rohatgi MERGER AND ACQUISITION

Illustration 9
XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC Ltd.
Relevant financial data are as follows:

Equity shares outstanding 10,00,000 4,00,000

(i)
EPS (`) 40 28
Market price per share (`) 250 160

Illustrate the impact of merger on EPS of both the companies.

(ii) The management of ABC Ltd. has quoted a share exchange
ratio of 1:1 for the merger. Assuming that P/E ratio of XYZ
Ltd. will remain unchanged after the merger, what will be
the gain from merger for ABC Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ
Ltd.
Illustration 10:
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 after 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 earnings per share (EPS) and P/E ratios of both
the companies?
(i) If ABC Ltd.’s P/E ratio is 6.4, what is its current market price? What is the exchange
ratio? What will XYZ Ltd.’s post-merger EPS be?
(ii) What should be the exchange ratio; if XYZ Ltd.’s pre-merger and post-merger
EPS are to be the same?

Illustration 11:
1. Following information is provided relating to the acquiring company Mani Ltd. and the
target company Ratnam Ltd:
Mani Ltd. Ratnam
Ltd.
Earnings after tax (` lakhs) 2,000 4,000
No. of shares outstanding (lakhs) 200 1,000
P/E ratio (No. of times) 10 5
Required:

4
 CA.CS.CMA.MBA: Naveen. Rohatgi MERGER AND ACQUISITION

(i) What is the swap ratio based on current market prices?

(ii) What is the EPS of Mani Ltd. after the acquisition?
(iii) What is the expected market price per share of Mani Ltd. after the acquisition,
assuming its P/E ratio is adversely affected by 10%?
(iv) Determine the market value of the merged Co.
(v) Calculate gain/loss for the shareholders of the two independent entities, due to the
merger.

Illustration 12:
You have been provided the following Financial data of two companies:

Krishna Ltd. Rama Ltd.

Earnings after taxes ` 7,00,000 ` 10,00,000
No. of Equity shares (outstanding) 2,00,000 4,00,000
EPS 3.5 2.5
P/E ratio 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 ratio is based on the market
prices 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.
and Krishna Ltd.?
(iii) Determine the market value of the post-merger firm. PE ratio is likely to
remain the same.
(iv) Ascertain the profits accruing to shareholders of both the companies.

Illustration 13:
M Co. Ltd. is studying the possible acquisition of N Co. Ltd., by way of merger.
The following data are available in respect of the companies:

Particulars M Co. Ltd. N Co. Ltd.

(i) If the merger goes through by exchange of equity and the exchange
Earnings after tax (`) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (`) 200 160

(ii) N Co. Ltd. wants to be sure that the earnings available to

its shareholders will not be diminished by the merger. What
should be the exchange ratio in that case?

5
CA.CS.CMA.MBA: Naveen. Rohatgi MERGER AND ACQUISITION