Chapter 14 Mergers Acquisitions and Corporate Restructuring
1. Synergy Formula in Mergers and Acquisitions
𝑉(𝐴𝐵) > 𝑉(𝐴) + 𝑉(𝐵)
• 𝑉(𝐴𝐵): Value of the combined firm after merger or acquisition
• 𝑉(𝐴): Value of firm A before merger
• 𝑉(𝐵): Value of firm B before merger
2. Value Equation Including Synergy
Value of acquirer + Stand-alone value of target + Value of synergy = Combined value
• Value of acquirer: Market or intrinsic value of acquiring company
• Stand-alone value of target: Market or intrinsic value of target company separately
• Value of synergy: Additional value created by combining firms
• Combined value: Market or intrinsic value of merged entity
3. Synergy Calculation (Numerical Example)
Synergy = 𝑉𝐴𝐵 − (𝑉𝐴 + 𝑉𝐵 )
• 𝑉𝐴𝐵 : Combined value of merged entity
• 𝑉𝐴 : Value of acquirer
• 𝑉𝐵 : Value of target
4. Net Gain from Acquisition
Net gain = Synergy − Premium paid
• Synergy: As above
• Premium paid: Additional amount paid over market value, including integration costs
Chapter 14 Mergers Acquisitions and Corporate Restructuring
5. Earnings Per Share (EPS) After Merger (General)
Total earnings after merger
EPSafter =
Total shares outstanding after merger
• Total earnings after merger: Sum of earnings of acquirer and target (including synergy, if any)
• Total shares outstanding after merger: Sum of shares of acquirer plus new shares issued
6. Exchange Ratio (in Share-for-Share Acquisition)
Price per share of target
Exchange ratio =
Price per share of acquirer
• Price per share of target: Market price of target company’s shares
• Price per share of acquirer: Market price of acquiring company’s shares
7. Exchange Ratio Based on EPS (Alternative)
EPS of target
Exchange ratio =
EPS of acquirer
• EPS of target: Earnings per share of target company
• EPS of acquirer: Earnings per share of acquiring company
8. Market Value of Firm
Market Value = EPS × P/E ratio × Number of shares
• EPS: Earnings per share
• P/E ratio: Price to earnings ratio
• Number of shares: Total outstanding shares of the company
Chapter 14 Mergers Acquisitions and Corporate Restructuring
9. Price Earnings (P/E) Ratio Relation
𝑃 = P/E ratio × 𝐸
• 𝑃: Market price per share
• 𝐸: Earnings per share
• P/E ratio: Price earnings ratio (reciprocal of cost of equity)
10. Swap Ratio Determination (Weighted Average)
Swap Ratio = ∑(Weight𝑖 × Ratio𝑖 )
• Weight𝑖 : Assigned weight to parameter 𝑖 (e.g., EPS, Book Value, Market Price)
• Ratio𝑖 : Ratio based on parameter 𝑖 (e.g., EPS ratio, Book Value ratio, Market Price ratio)
11. Price per Share for Share Exchange (Average Market Price)
Highest Market Price + Lowest Market Price
Price per share =
2
• Highest Market Price: Highest trading price over a period
• Lowest Market Price: Lowest trading price over a period
12. Capital Asset Pricing Model (Simplified for Valuation)
𝐷
𝐾𝑒 = +𝑔
𝑃
• 𝐾𝑒 : Cost of equity or required rate of return
• 𝐷: Dividend per share
• 𝑃: Market price per share
• 𝑔: Growth rate of dividends or earnings
Chapter 14 Mergers Acquisitions and Corporate Restructuring
13. Price of Share After Acquisition (Growth Model)
𝐷
𝑃=
𝐾𝑒 − 𝑔
• 𝑃: Price per share
• 𝐷: Dividend per share
• 𝐾𝑒 : Cost of equity
• 𝑔: Growth rate
14. Present Value of Terminal Value (TV)
𝐶𝐹 × (1 + 𝑔)
PV 𝑇𝑉 = × PVF
𝐾−𝑔
• 𝐶𝐹: Cash flow in the final year of projection
• 𝑔: Growth rate after projection period
• 𝐾: Discount rate or cost of capital
• PVF: Present value factor for the final year
15. Present Value of Future Cash Flows (Years 1 to n)
𝑛
PV = ∑ 𝐶 𝐹𝑡 × 𝑃𝑉𝐹𝑡
𝑡=1
• 𝐶𝐹𝑡 : Cash flow in year 𝑡
• 𝑃𝑉𝐹𝑡 : Present value factor for year 𝑡
16. Earnings Per Share (EPS) Calculation
Earnings after tax
EPS =
Number of equity shares outstanding
• Earnings after tax: Net profit available to equity shareholders
• Number of equity shares outstanding: Total shares held by shareholders
Chapter 14 Mergers Acquisitions and Corporate Restructuring
17. Market Price per Share (MPS) from EPS and P/E Ratio
MPS = EPS × P/E ratio
• EPS: Earnings per share
• P/E ratio: Price earnings ratio
18. Return on Equity (ROE)
Earnings after tax
𝑅𝑂𝐸 =
Shareholders’ equity
• Earnings after tax: Net income attributable to shareholders
• Shareholders’ equity: Book value of equity
19. Growth Rate of EPS (Sustainable Growth Rate)
𝑔 = 𝑅𝑂𝐸 × (1 − Dividend Payout Ratio)
• 𝑔: Growth rate of earnings
• ROE: Return on equity
• Dividend Payout Ratio: Proportion of earnings paid as dividends
20. Capital Adequacy Ratio (CAR)
Total Capital
𝐶𝐴𝑅 = × 100
Risk Weighted Assets
• Total Capital: Sum of Tier I and Tier II capital
• Risk Weighted Assets: Assets weighted by risk factors
21. Gross Non-Performing Assets (Gross NPA) Ratio
Gross NPA
Gross NPA Ratio = × 100
Gross Advances
• Gross NPA: Total non-performing assets
• Gross Advances: Total loans and advances
Chapter 14 Mergers Acquisitions and Corporate Restructuring
22. Swap Ratio Based on Market Price
Market Price of Target
Swap Ratio =
Market Price of Acquirer
• Market Price of Target: Price per share of target company
• Market Price of Acquirer: Price per share of acquiring company
23. Swap Ratio Based on Earnings Per Share (EPS)
EPS of Target
Swap Ratio =
EPS of Acquirer
• EPS of Target: Earnings per share of target
• EPS of Acquirer: Earnings per share of acquiring company
24. Swap Ratio with Weighted Parameters (Earnings, Book Value, Market Price)
𝐸𝑡𝑎𝑟𝑔𝑒𝑡 𝐵𝑉𝑡𝑎𝑟𝑔𝑒𝑡 𝑀𝑃𝑡𝑎𝑟𝑔𝑒𝑡
Swap Ratio = 𝑤1 × + 𝑤2 × + 𝑤3 ×
𝐸𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝐵𝑉𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑀𝑃𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟
• 𝑤1 , 𝑤2 , 𝑤3 : Weights assigned to earnings, book value and market price respectively
• 𝐸𝑡𝑎𝑟𝑔𝑒𝑡 , 𝐸𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 : Earnings of target and acquirer
• 𝐵𝑉𝑡𝑎𝑟𝑔𝑒𝑡 , 𝐵𝑉𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 : Book values of target and acquirer
• 𝑀𝑃𝑡𝑎𝑟𝑔𝑒𝑡 , 𝑀𝑃𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 : Market prices of target and acquirer
25. Market Value of Merged Firm
Market Value𝑚𝑒𝑟𝑔𝑒𝑑 = EPS𝑚𝑒𝑟𝑔𝑒𝑑 × P/E ratio𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 × Shares outstanding𝑚𝑒𝑟𝑔𝑒𝑑
• EPS𝑚𝑒𝑟𝑔𝑒𝑑 : Earnings per share after merger
• P/E ratio𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑟 : P/E ratio of acquiring firm (may be adjusted)
• Shares outstanding𝑚𝑒𝑟𝑔𝑒𝑑 : Total shares post-merger
Chapter 14 Mergers Acquisitions and Corporate Restructuring
26. Earnings Per Share (EPS) Accretion/Dilution
Δ𝐸𝑃𝑆 = 𝐸𝑃𝑆𝑝𝑜𝑠𝑡−𝑚𝑒𝑟𝑔𝑒𝑟 − 𝐸𝑃𝑆𝑝𝑟𝑒−𝑚𝑒𝑟𝑔𝑒𝑟
• 𝐸𝑃𝑆𝑝𝑜𝑠𝑡−𝑚𝑒𝑟𝑔𝑒𝑟 : EPS after merger
• 𝐸𝑃𝑆𝑝𝑟𝑒−𝑚𝑒𝑟𝑔𝑒𝑟 : EPS before merger
27. Book Value Per Share (BVPS)
Net Worth
𝐵𝑉𝑃𝑆 =
Number of Equity Shares
• Net Worth: Equity capital plus reserves minus intangible assets
• Number of Equity Shares: Total issued shares
28. Price per Share (Post-Merger)
Price per Share𝑝𝑜𝑠𝑡 = 𝐸𝑃𝑆𝑝𝑜𝑠𝑡 × 𝑃/𝐸𝑝𝑜𝑠𝑡
• 𝐸𝑃𝑆𝑝𝑜𝑠𝑡 : Earnings per share after merger
• 𝑃/𝐸𝑝𝑜𝑠𝑡 : Price earnings ratio after merger
29. Capital Reserve on Merger (Simplified)
Capital Reserve = Net Worth of Transferor − Value of Shares Issued
• Net Worth of Transferor: Book value of transferor company
• Value of Shares Issued: Market value of shares issued for acquisition
Chapter 14 Mergers Acquisitions and Corporate Restructuring
30. Net Present Value (NPV) of Acquisition
𝑛
𝑁𝑃𝑉 = ∑ 𝐶 𝐹𝑡 × 𝑃𝑉𝐹𝑡 + 𝑇𝑉 × 𝑃𝑉𝐹𝑛 − Initial Investment
𝑡=1
• 𝐶𝐹𝑡 : Cash flow in year 𝑡
• 𝑃𝑉𝐹𝑡 : Present value factor for year 𝑡
• 𝑇𝑉: Terminal value after projection period
• 𝑃𝑉𝐹𝑛 : Present value factor for year 𝑛
• Initial Investment: Cost of acquisition or capital outlay
31. Maximum Price Per Equity Share Offerable (Swap Ratio Method)
Swap Ratio(𝐸𝑅) ⇒ ∑(Value of acquirer shares + Synergy + Savings) = ∑(Value of target shares × 𝐸𝑅)
• 𝐸𝑅: Exchange ratio
• Value of acquirer shares: Market price × number of shares
• Synergy: Present value of synergy gains
• Savings: Present value of cost savings
• Value of target shares: Market price × number of shares