Acquisition: - An acquisition is when both the
acquiring and acquired companies are still left standing as separate entities at
the end of the transaction.
Merger: - A merger results in the legal
dissolution of one of the companies.
Consolidation: -
A consolidation
dissolves both the parties and creates a new one into which the previous
entities are merged.
Types of Merger
Horizontal
Merger: - The
two companies which have merged are in the same the Industries.
Vertical Merger:
- This happens
when two companies that have ‘buyer – seller’ relationship (or potential buyer
– seller relationship) come together.
Conglomerate
Merger: - Such merger
involves firms engaged in unrelated type of business operation.
Congeneric
Merger: - In
these mergers, the acquired and the target companies are related through basic
technologies, production process or market.
Reverse Merger:
- Such merger
involves acquisition of a public (Shell Company) by a private company.
Reasons for
Mergers and Acquisitions
Synergistic
operating economic: - synergy may be defined as
V(AB)
> V(A) + V(B)
The difference
between the combined value and the stand value of target and Acquire is
attributable to synergy.
Net gain is the
value of synergy – premium paid
Premium Paid =
Price paid over the market value + other costs of integration.
Diversification: -
In case of merger between two unrelated companies would lead to reduction in
business risk.
Taxation: - The
provision of set off and carry forward of losses as per Income Tax Act may be
another strong reason for merger and acquisition.
Growth: - The
Acquiring Company avoids delays such attached with purchasing of building,
site, and setting up of the plant and hiring personal etc.
Consolidation of Production
Capacities and increasing market power: - Due to reduced competition marketing
power increases and also the production capacities are increased by combined of
two or more plants.
Exchange/Swap
Ratio
If Deals is based
on EPS then,
Swap Ratio = (EPS
of Target) / (EPS of Acquirer)
If Deals is based
on MPS then,
Swap Ratio = (MPS
of Target) / (MPS of Target)
If Deal is based on
Book Value per Share (BVPS) then,
Swap Ratio = (BVPS
of Target) / (BVPS of Acquirer)
Note: -
If Deal is based on
EPS then there would be no Gain/Loss to shareholders of both companies in
earning them. It means if Deal happens in any other ration other than EPS then one
party would gain and another party will lose in term. The above concept is
applicable only when there 100% stocks deal. Both parties can gain in terms of
market value terms.
Minimum and
Maximum Exchange Ratio
Minimum Exchange
Ratio is the minimum Expectation of Target to get amount or share so that there
would be no loss to target in terms of EPS or MPS.
Maximum Exchange
Ratio is the ability of acquirer to pay to target company that amount which
would do not results to lose in the value of EPS or MPS term.
S.
No.
|
Formula
|
||
1.
|
Maximum
Exchange Ratio in Terms of EPS
|
EPSold
=
|
Earning
of Acquirer + Earning of Target + Synergy Gain
No.
of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
|
2.
|
Maximum
Exchange Ratio in Terms of MPS
|
MPSold
=
|
Market
Value of Acquirer + Market Value of Target + Synergy Gain
No.
of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
|
3.
|
Minimum
Exchange Ratio in Terms of EPS
|
EPSold
=
|
(Earning
of Acquirer + Earning of Target + Synergy Gain) x ER
No.
of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
|
4.
|
Minimum
Exchange Ratio in Terms of MPS
|
MPSold
=
|
(Market
Value of Acquirer + Market Value of Target + Synergy Gain) x ER
No.
of Share Outstanding of Acquirer + (No. of Share Outstanding of Target X ER)
|
Free Float
Capital
Shares Held by
Public is known as free float shares.
Free Float Market Capitalization
= Free Float Shares X Share Price
Non – Free Float
Capital
Shares held by
promoter are known as non- free float shares.
Non- free Float
Market Capitalization = Share Held by Promoters X Share Price
Total Market
Capitalization = Free Float Market Capitalization + Non Free Float Market
Capitalization
Accretion –
Dilution Analysis
If Post Acquisition
EPS increase we call deal is Accretive.
If Post Acquisition
EPS decrease we call deal is dilutive.
If a high P/E Ratio
Acquires a low P/E Ratio by issue of shares then Deal would be Accretive
(increase in EPS) for Acquirer and dilutive (decrease in EPS) for target.
Value of
Acquisition = Post Acquisition – Pre Acquisition Value of Merged Entity
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JCF capital advisors California, JCF capital advisors services If your company has been through an acquisition or merger, you already know that the different cultures of the companies involved always make the situation challenging. In hostile takeovers, it can prove devastating. Employees often find that the behaviors previously rewarded by their company can sometimes result in demotion or dismissal. Performance criteria change, as do the people measuring the performance.
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