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PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS

Dept. of MBA

Lesson Plan
Semester – IV

Subject Code : 14MBAFM407 Total no of Lectures:


56
Subject Title : MERGERS, ACQUISTIONS AND
CORPORATE RESTRUCTURING IA Marks:
50
Type : ELECTIVE Credits:
Faculty Name : Mr. Suresh A S Exam Hours:
03
No of Lecture Hours / Week: 04 Exam Marks:
100
Practical Component Hour : 01 Ratio of theory to
problems: 80:20
Pre-Requisite: Mention the pre-requisite course code if required

Course Objectives:

 To facilitate understanding of corporate merger and acquisition activity and restructuring


 To communicate to the students the role that M&A plays in the contemporary corporate world.
 To understand how to use M & A as a strategic tool.
 To compare and contrast the various forms of corporate restructuring.
 To assess human and cultural aspects of M&A’s
Course Outcomes:

At the end of the course students will be able to:

1. Understand corporate merger and acquisition activity


2. Analyse the mergers & acquisition deals that have taken place in the recent past.
3. Understand synergies of mergers & acquisition deals.
4. Compute the valuation associated with M&A.
5. Understand the human and cultural aspects of M&A’s

Table - 1
Session Plan
Session No.
Module No

Cumulative Coverage
Contents Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work

I 1 Course Outline: Mergers – in the Lecture Refer the Refer the # Class Discussion
nature of Acquisition, types of mergers, Table 2 Table 3 # Case Presentation
motives behind mergers

Course Objective: to understand the


types of mergers, motives behind
mergers 18%

Course Outcome: Students will get the


basic idea about types of mergers,
motives behind mergers.
2 Course Outline: Theories of mergers Lecture Refer the Refer the # Class Discussion
Problem solving Table 2 Table 3 # Case Presentation
Course Objective: to understand the
various types of mergers, motives behind
mergers

Course Outcome: students will know


the types of mergers, motives behind
mergers.

3-4 Course Outline: Synergy – meaning Lecture Refer the Refer the # Class Discussion
and types. Operating, financial and Problem solving Table 2 Table 3 # Case Presentation
managerial synergy of mergers

Course Objective: to evaluate the


Operating, financial and managerial
synergy of mergers

Course Outcome: students will know


the difference between Operating,
financial and managerial synergy of
mergers

5 Course Outline: value creation in Lecture Refer the Refer the # Class Discussion
horizontal, vertical and conglomerate Problem solving Table 2 Table 3 # Case Presentation
mergers

Course Objective: to understand the


process of value creation in horizontal,
vertical and conglomerate mergers

Course Outcome: students will be able


to understand the value creation in
horizontal, vertical and conglomerate
mergers
6-7 Course Outline: Internal and external Lecture Refer the Refer the # Class Discussion
change forces contributing to M & A Table 2 Table 3 # Case Presentation
activities and Impact of M & A on
stakeholders.

Course Objective: to understand the


Impact of M & A on stakeholders.

Course Outcome: students will know


the features and Impact of M & A on
stakeholders.

II 8 Course Outline: M & A – A strategic Lecture Refer the Refer the # Class Discussion
perspective- industry life cycle analysis in Case Discussion Table 2 Table 3 # Test I
M&A decision

Course Objective: introduction of


industry life cycle analysis in M&A
decision

Course Outcome: Student’s will


understand the industry life cycle
analysis in M&A decision

9 -10 Course Outline: Product life cycle Student Practical Refer the Refer the
analysis in M&A decision and strategic Presentation / Component Table 2 Table 2
approaches to M&A- SWOT analysis, BCG Participation
matrix

Course Objective: to understand the


Product life cycle analysis in M&A

Course Outcome: students will know


the Problem in Product life cycle analysis
in M&A
Session No.
Module No

Cumulative Coverage
Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work

Course Outline: Application of Porter’s


11 Five forces model Lecture Refer the Refer the # Class Discussion
Video Table 2 Table 3 # Test I
Course Objective: to understand the # Case Presentation
Application of Porter’s Five forces model

Course Outcome: students will know


the Problem on historical performance. 36%

III Course Outline: Corporate


12 restructuring – different methods of Lecture Refer the Refer the # Class Discussion
restructuring – joint ventures Case Discussion Table 2 Table 3 # Test I
# Case Presentation
Course Objective: to understand the
different methods of restructuring

Course Outcome: students will


understand the different methods of
restructuring
Course Outline: Sell off and spin off –
13 -14 divestitures – equity carve out Lecture Refer the Refer the # Class Discussion
Case Discussion Table 2 Table 3 # Test I
Course Objective: to understand the # Case Presentation
difference between Sell off and spin off

Course Outcome: students will be able


to identify the Sell off and spin off
strategies

Course Outline: Leveraged buy outs


15 – 16 (LBO) – management buy outs and Lecture Refer the Refer the # Class Discussion
Master limited partnerships Case Discussion Table 2 Table 3 # Test I
# Case Presentation
Course Objective: to evaluate the
difference between LBO & MBO

Course Outcome: students will know


the difference between LBO & MBO

Course Outline: Limited Liability


17 – 18 Partnership (LLP) in India. Nature and Lecture Refer the Refer the # Class Discussion
incorporation of LLP Case Discussion Table 2 Table 3 # Case Presentation

Course Objective: to understand the


working of LLP in India

Course Outcome: students will


understand the need for LLP
Course Outline: De merger- strategic
19-20 alliance and employee stock Lecture Refer the Refer the # Class Discussion
ownership plans (ESOP) Case Discussion Table 2 Table 3 # Case Presentation
Video
Course Objective: to understand the
De merger- strategic alliance

Course Outcome: students will


understand the difference between De
merger- strategic alliances.
Session No.

Cumulative Coverage
Module No

Contents Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work
Course Outline: Merger Process:
Dynamics of M&A process- identification
IV 21 of targets negotiation- closing the deal. Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test II
Course Objective: to understand the Video # Case Presentation
process of merger

Course Outcome: students will


understand the steps in merger process.

Course Outline: Five stage model –


22 due diligence (detailed discussion). Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test II
Course Objective: to understand the Video # Case Presentation
due diligence process
50%
Course Outcome: students will
understand the process of due diligence.

Course Outline: Process of merger


23 – 24 integration – organizational and human Lecture Refer the Refer the # Class Discussion
aspects – managerial challenges of M&A. Cases Discussion Table 2 Table 3 # Test II
Problem solving # Case Presentation
Course Objective: to understand the
organizational and human aspects in
M&A.

Course Outcome: students will


understand Free cash flow to
Equity (FCFE) model
Course Outline: Methods of
25-26 financing mergers – cash offer and Lecture Refer the Refer the # Class Discussion
Share exchange ratio – mergers as a Cases Discussion Table 2 Table 3 # Test II
capital budgeting decision Problem solving # Case Presentation

Course Objective: to solve problems


on cash offer

Course Outcome: students will


understand procedure of cash offer.

Course Outline: Problems on cash


27-28 offer Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test II
Course Objective: to solve problems Problem solving # Case Presentation
on cash offer

Course Outcome: students will be able


to solve practical problems on cash offer
Session No.
Module No

Cumulative Coverage
Contents Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work
29-30 Course Outline: Problems on cash Lecture Refer the Refer the # Class Discussion
offer and share exchange ratio Cases Discussion Table 2 Table 3 # Test II
Video # Case Presentation
Course Objective: to evaluate the
problems on share exchange ratio

Course Outcome: students will


understand the problems on share
exchange ratio

31 Course Outline: Synergies from M&A: Lecture Refer the Refer the # Class Discussion
Operating and Financial synergy Cases Discussion Table 2 Table 3 # Test II
# Case Presentation
Course Objective: to understand the
Synergies from M&A
64%
Course Outcome: students will
understand the Synergies from M&A

32 Course Outline: Accounting for Lecture Refer the Refer the # Class Discussion
amalgamation – pooling of interest Cases Discussion Table 2 Table 3 # Test II
method, purchase method # Case Presentation

Course Objective: to solve problems on


pooling of interest method

Course Outcome: students will


understand the pooling of interest method
33-34 Course Outline: Problems on pooling of Lecture Refer the Refer the # Class Discussion
interest method, purchase method Cases Discussion Table 2 Table 3 # Test II
# Case Presentation
Course Objective: to solve Problems on
pooling of interest method

Course Outcome: students will


understand the procedure to solve
problem

35-36 Course Outline: Problems on Mergers Lecture Refer the Refer the # Class Discussion
and Acquisition Cases Discussion Table 2 Table 3 # Test II
# Case Presentation
Course Objective: to solve Problems on
Mergers and Acquisition

Course Outcome: students will be able to


solve Problems on Mergers and Acquisition

37 Course Outline: Problems on Mergers Lecture Refer the Refer the # Class Discussion
and Acquisition Cases Discussion Table 2 Table 3 # Test II
# Case Presentation
Course Objective: to solve Problems on
Mergers and Acquisition

Course Outcome: students will be able to


solve Problems on Mergers and Acquisition

38 Course Outline: Problems on Mergers Lecture Refer the Refer the # Class Discussion
and Acquisition Cases Discussion Table 2 Table 3 # Test II
# Case Presentation
Course Objective: to solve Problems on
Mergers and Acquisition

Course Outcome: students will be able to


solve Problems on Mergers and Acquisition
Session No.
Module No

Cumulative Coverage
Contents Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work

39 Course Outline: Problems on Mergers Lecture Refer the Refer the # Class Discussion
and Acquisition Cases Discussion Table 2 Table 3 # Test III
Video # Case Presentation
Course Objective: to solve Problems on
Mergers and Acquisition

Course Outcome: students will be able to


solve Problems on Mergers and Acquisition 78%

40 Course Outline: Problems on Mergers Lecture Refer the Refer the # Class Discussion
and Acquisition Cases Discussion Table 2 Table 3 # Test III
Video # Case Presentation
Course Objective: to solve Problems on Problem solving
Mergers and Acquisition

Course Outcome: students will be able to


solve Problems on Mergers and Acquisition
41 Course Outline: Case study on M & A Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test III
Course Objective: to analyze case Video # Case Presentation

Course Outcome: students will be able to


analyze case study

VI 42 Course Outline: Takeovers, types of Lecture Refer the Refer the # Class Discussion
takeovers Cases Discussion Table 2 Table 3 # Test III
Video # Case Presentation
Course Objective: to understand the,
types of takeovers.

Course Outcome: students will


understand the various types of takeovers
available.

43 Course Outline: Takeover strategies, Lecture Refer the Refer the # Class Discussion
Takeover defenses – financial defensive Cases Discussion Table 2 Table 3 # Test III
measures Video # Case Presentation

Course Objective: to understand the


takeover strategies

Course Outcome: students will


understand the financial defensive
measures

44 Course Outline: financial defensive Lecture Refer the Refer the # Class Discussion
measures – methods of resistance Cases Discussion Table 2 Table 3 # Test III
Video # Case Presentation
Course Objective: to understand the
methods of resistance

Course Outcome: students will


understand the various methods of
resistance.
Session No.
Module No

Cumulative Coverage
Contents Pedagogical Presentation Assignments

Evaluation Technique LearningStudent


Tools /Practical / additional
Component work

45 Course Outline: anti-takeover Lecture Refer the Refer the # Class Discussion
amendments – poison pills Cases Discussion Table 2 Table 3 # Test I
Video # Case Presentation
Course Objective: to understand the
anti-takeover amendments
88%
Course Outcome: students will
understand the anti-takeover amendments
available.
VII 46-47 Course Outline: Legal aspects of Lecture Refer the Refer the # Class Discussion
Mergers/amalgamations and Cases Discussion Table 2 Table 3 # Test I
acquisitions/takeovers- Combination and Video # Case Presentation
Competition Act

Course Objective: to understand the :


Legal aspects of Mergers

Course Outcome: students will


understand the Legal aspects of Mergers

48 Course Outline: Competition Commission Lecture Refer the Refer the # Class Discussion
of India (CCI)- CCI Procedure in Regard to Cases Discussion Table 2 Table 3 # Test I
the transactions of Business Relating to Video # Case Presentation
combination of Regulations 2011

Course Objective: to understand the


procedures of Competition Commission of
India

Course Outcome: students will


understand the CCI Procedure in Regard to
the transactions of Business

49-50 Course Outline: Scheme of Lecture Refer the Refer the # Class Discussion
Merger/Amalgamation-essential features of Cases Discussion Table 2 Table 3 # Test III
the scheme of amalgamation Video # Case Presentation

Course Objective: to understand the


essential features of the scheme of
amalgamation 100%

Course Outcome: students will


understand essential features of the
scheme of amalgamation
51 Course Outline: Scheme of Lecture Refer the Refer the # Class Discussion
Merger/Amalgamation-essential features of Cases Discussion Table 2 Table 3 # Test III
the scheme of amalgamation Video # Case Presentation

Course Objective: to understand the


essential features of the scheme of
amalgamation

Course Outcome: students will


understand essential features of the
scheme of amalgamation

52 Course Outline: Approvals for the Lecture Refer the Refer the # Class Discussion
scheme-Step wise procedure- Cases Discussion Table 2 Table 3 # Test III
Acquisitions/Takeovers- Listing agreement- Video # Case Presentation
The SEBI Substantial Acquisition of Shares
and Takeover code

Course Objective: to understand the


SEBI Substantial Acquisition of Shares and
Takeover code

Course Outcome: students will


understand Approvals for the scheme

53 Course Outline: Approvals for the Lecture Refer the Refer the # Class Discussion
scheme-Step wise procedure- Cases Discussion Table 2 Table 3 # Test III
Acquisitions/Takeovers- Listing agreement- Video # Case Presentation
The SEBI Substantial Acquisition of Shares
and Takeover code

Course Objective: to understand the


SEBI Substantial Acquisition of Shares and
Takeover code

Course Outcome: students will


understand Approvals for the scheme
54 Course Outline: Case study Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test III
Course Objective: to understand the Video # Case Presentation
concepts through case study

Course Outcome: students will


understand the latest trends in M & A

55 Course Outline: Case study Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test III
Course Objective: to understand the Video # Case Presentation
concepts through case study

Course Outcome: students will


understand the latest trends in valuation of
mergers

56 Course Outline: Case study Lecture Refer the Refer the # Class Discussion
Cases Discussion Table 2 Table 3 # Test III
Course Objective: to understand the Video # Case Presentation
concepts through case study

Course Outcome: students will


understand the latest trends in corporate
restructuring

Syllabus Review A complete revision through the presentation by the students based on the
presentation topics
Table – 2
Presentation Topics

Mod NoS.No. Presentation Topic


1 1 Types of merger
1 2 Synergies of merger
1 3 Driving forces for M&A
2 4 Joint ventures
3 5 Sell-off & spin-off
3 6 Leveraged buy out
3 7 Management buy out
3 8 Master limited partnership
4 9 Process of merger
4 10 Due diligence
4 11 Human aspect of M&A
6 12 Types of take over
7 13 Takeover defense
7 14 Provision of companies act
7 15 Indian income tax act
7 16 SEBI takeover code
7 17 Provision of competition act
Table – 3
Assignments & Additional Work
S.No. Mod. No. Assignment Topic
1 to 30 I to VI Assignment – 1:
Each student will be given one question each from
Question Bank from the following manner (One 2 marks
question, One 6 marks question and One 8 marks
question) from module 1 to 2.

Assignment – 2:
Each student will be given one question each from
Question Bank from the following manner (One 2 marks
question, One 6 marks question and One 8 marks
question) from module 3 to 4.

Assignment – 3:
Each student will be given one question each from
Question Bank from the following manner (One 2 marks
question, One 6 marks question and One 8 marks
question) from module 5 to 6.

Two Surprise Quizzes will be conducted during this


period.
Question Bank contents will be divided as an assignment topics to the students
Table – 4
Case Study Topics

Case studies will be based on both previous year question paper & as well as live case, apart from the below mentioned cases it is
open to the students to come out with new cases happening in the course of time

Mod No Particulars
5&6 Question Paper, VTU, JULY 2014
5&6 Question Paper, VTU, December 2012 / January 2013
5&6 Question Paper, VTU, JULY 2013
5&6 Question Paper, VTU, December 2011 / January 2012
5&6 Question Paper, VTU, JULY 2011
5&6 Question Paper, VTU, December 2009 / January 2010
5&6 Question Paper, VTU, July 2009
5&6 Question Paper, VTU, December 2005 / January 2009
5&6 Question Paper, VTU, January / February 2008
J P Morgan & Manhattan case
UTI Bank and Global Trust Bank acquisition
Brook Bond Lipton & HLL case
Damodar cement merged with ACC cement casew
Acquisition of TOMCO by HLL
Bank of Madhura merging with ICICI Bank
Mohta steel industries merged with Vardhaman spinning mills
Table – 5
References & Additional Readings

Sl.No. Particulars
1 Fred Weston, Kwang S Chung, Susan E Hoag – Mergers, Restructuring and
Corporate Control – Pearson Education, 4/e

2 Mergers acquisitions and Business valuation – Ravindhar Vadapalli – Excel books, 1/e
2007

3 Ashwath Damodaran – Corporate Finance-Theory and Practice – John Wiley & Sons

4 Shukla & Grewal- Advanced Accounts Vol 2 – S.Chand & Sons, Recommended book
for module-6

5 Company Law & Practice – Taxmann – Recommended book for module-8

6 Students Guides to I.T. Act 1969

7 Sudi Sudarsanam – Value Creation from Mergers and Acquisitions – Pearson


Education, 1/e, 2003

8 Merger Acquisitions & Corporate Restructuring – Chandrashekar Krishna Murthy &


Vishwanath. S.R – Sage Publication.

9 Shiv Ramu – Corporate Growth through Mergers and Acquisitions – Response


Books
Table – 6
IA Pattern

Test Marks Practical / Presentations Assignments / Seminars


60% 20% 20%

 For Internal Evaluation T1 marks and the best out of remaining two will be considered.

 1st Test is mandatory.

Question Bank
14MBAFM407: MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING

3 Marks Questions:

1. What are split up’s?


2. What are spin offs?
3. Distinguish between spin off and split up?
4. How does operating synergy differ from financial synergy?
5. Define the term merger.
6. What is meant by ‘synergy of a merger?
7. Describe financial synergy of merger.
8. What is meant by reverse merger?
9. Differentiate between horizontal and vertical mergers.
10. What do you understand by horizontal and vertical mergers?
11. Explain acquisition or takeover. Mention its types.
12. Define the term holding company.
13. Mention any three synergies that exist in conglomerate mergers.
14. What are the different types of mergers?
15. What are agency problems? How do they arise?
16. What is MLP?
17. What is LBO? When is it used?
18. What is an MBO? How is it different from LBO?
19. Define term ‘Equity Carve Out’.
20. What is meant by ‘Corporate Restructuring’?
21. What is the rationale behind divestures?
22. State the advantages of ESOPs.
23. What do you mean by ESOPs?
24. What is divestiture?
25. Give the six reasons for firms to engage in joint ventures.
26. What is sell-off? How is it different from spin off?
27. What is cultural shock in a merger?
28. What is relative valuation?
29. Illustrate the impact of mergers on EPS, MPS and Book value per share of the acquiring company.
30. Enumerate the steps involved in valuation of a merger.
31. What is free cash flow?
32. What is meant by free cash flow to the firm?
33. What do you mean by valuation of a firm?
34. What is price earnings ratio?
35. What is mezzanine financing?
36. What is pooling of interest method in case of mergers?
37. Define the term ‘Amalgamation’.
38. What is flip over Poison Pill Plan.
39. What is poison pill?
40. Define hostile takeovers.
41. What is proxy contest?
42. How are mergers financed? Briefly explain any one.
43. What is pyramiding?
44. Discuss the various forms of financing a merger.
7 Marks Questions:

1. Explain the motives and benefits of mergers and acquisitions.


2. What is ‘synergy’ in mergers? How would you distinguish managerial synergy from financial synergy?
3. Explain the motives and benefits of mergers and acquisitions.
4. What is synergy and what are the synergies that can arise from a merger?
5. Explain in detail financial synergy.
6. What are conglomerate mergers? Distinguish between the various types of conglomerate mergers.
7. Briefly explain the reasons for merger.
8. Write short notes on:
i) Split up
ii) Spin off and
iii) Hubris Hypothesis.
9. Explain the role of industry life cycle on mergers.
10. Explain the various types of merger and various stages of industry life cycle.
11. Explain the rationale behind joint venture.
12. Explain the different methods of divestiture.
13. Briefly explain the different rationales for gains to sell offs.
14. Explain the objectives by Divestiture?
15. Briefly explain the various forms of corporate restructuring.
16. What do you mean by ESOPs? What are the benefits of ESOPs?
17. How does an LBO differ from MBO? On what criteria the companies fall as targets for the LBO?
18. What is Master Limited Partnership? What are its advantages?
19. What is LBO? Explain different stages of LBO operations.
20. What do you mean by ‘Tender offer’? Critically examine the objectives and the primary difference between joint
venture and Strategic Alliance?
21. Explain types of merger with suitable examples.
22. What is Due Diligence? Who is required to undertake it?
23. Who are the participants in acquisition process? What sorts of service do they provide?
24. What are human and cultural aspects that one should consider when M & A activity is increased?
25. Briefly explain the free cash flow method of valuation of a firm.
26. Write a note on each of the following
a) Market value of listed stock
b) Book value
c) Dividend approach
27. Explain free cash flow hypothesis and information and signaling theory of mergers.
28. Explain the free cash flow hypothesis.
29. Briefly explain the discounted cash flow model used to value the target company. Write a brief note on takeover
defenses.
30. Briefly state the conditions laid down by the companies Act, for deciding the purchase consideration of the acquiring
firm. Also state the procedure for computing the Terminal value of a firm applying DCF method in financial evaluation,
prior to merger.

31. Calculate the value of the firm using dividend growth valuation model from the following information of Rom
Company Ltd., during the recent year the company had a net income of Rs.2, 00,000 and paid a dividend of Rs.1,
00,000. The earnings and dividends are expected to grow at an annual rate of 20% for 3 years after which they will
grow at 8% for ever with annual retention continuing at 50% of net income. The required return on an investment with
the risk characteristics of the company stock is 16 percent.

32. The chemical and fertilizer limited, is a growing company. Its free cash flows for equity holders (FCFE) have been
growing at a rate of 25 per cent in recent years. This abnormal growth rate is expected to continue for another 5 years
then these FCFE are likely to grow at the normal rate of 8 per cent. The required rate of return on these shares, by the
investing community, is 15 per cent. The firm’s weighted average cost of capital is 12 per cent. The amount FCFE per
share at the beginning of the current year is Rs.30. Determine the maximum price an investor should be willing to pay
now (t=0) based on free cash flow approach. The issue price of share is Rs.500.

33. The relevant financial detail of two firms just prior to merger announcement areas follows:
Day Ltd., Night Ltd.,
Market price per share Rs.65 Rs.30
No. of shares 8,00,000 5,00,000
Market value of the firm Rs.520,00,000 Rs.150,00,000

The merger is expected to bring gains which have a present value of Rs.120,00,000. Day Ltd., offers 2,46,000 shares in
exchange for 5,00,000 shares to the shareholders of the firm Night Ltd. Assuming that the market value of two firms
just before the merger announcement are equal to their present value as separate entities. Calculate the NPV to Day
Ltd., and Night Ltd., respectively.

34. Mona Ltd is planning to acquire Sona Ltd., provided there is synergy in the acquisition, which will result in Mona Ltd.,
reporting an EPS of at least of Rs.2.75. Consider the following financial data:

Particulars Mona Ltd., Sona Ltd.,


EPS Rs.2.25 Rs.2.25
Market price per share Rs.18 Rs.12
P/E ratio 8 5.3
No. of shares 1,50,000 1,50,000

There is no immediate gain in the merger though there will be long term synergies. Compute the exchange ratio, which
will raise the post-merger EPS of Mona Ltd., to Rs.2.75.

35. Rahul international is keen on reporting EPS of Rs.3.50 after acquiring Overseas Corporation. The following data is
available:-

Particulars Rahul Overseas


International Corporation
EPS Rs.2.50 Rs.2.50
Market price per share Rs.28 Rs.18
P/E ratio 8 4
No. of shares 1,50,000 1,50,000

There is no gain from merger. What exchange ratio will raise the post-merger EPS of Rahul International to Rs. 3.50?

36. Explain the methods of determining the purchase consideration.


37. What are the methods of payment in case of an acquisition?
38. What are post-offer defenses against hostile takeover bids?
39. Briefly explain the concessions available to a firm when they merge under the Income Tax Act of 1961.
40. Briefly explain the provisions of Income Tax Act relating to mergers and acquisitions.
41. How do tax considerations affect mergers and their structuring?
42. Write a note on current scenario of mergers in India.
43. Explain in detail about
 Poison pill
 White night
 Greenmail
 Strategic alliance
 Bear Hug
 Golden parachute
 Staggered board
 White square
 Street swap
 Crown jewel

10 Marks Questions:

1. Briefly explain the differential efficiency and inefficient management theory of mergers.
2. What are the benefits of pure diversification?
3. Explain the concepts Horizontal, Vertical and Conglomerate mergers. Illustrate your answer with suitable examples in the
Indian context.
4. Explain in detail the various reasons responsible for the failure of a merger. How does the ‘bootstrapping phenomenon’
affect the valuation of a firm in mergers?
5. Explain efficiency theories of merger.
6. Explain the difference between managerial synergy, operating and financial synergy and their relationship to different types
of mergers.
7. Discuss the motives behind ‘Mergers and Acquisitions’.
8. Write a brief not on post-merger integration.
9. How does industrial life cycle influence restructuring activities?
10. Explain various reasons for Corporate Restructuring.
11. What is joint venture? What are the different rationale be behind a joint venture and what are the common reasons for
failure of joint ventures?
12. Explain the term joint venture. Do you accept that the joint ventures in India are successful?
13. Compare and contrast between spin-off and equity carve outs.
14. Explain various forms of corporate restructuring. Explain the nature of MLPs. How is an MLP different from a
corporation? What are the different MLPs identified?
15. What is LBO? Explain the different stages of LBO operation.
16. Explain the 5 steps to be taken care off before an acquisition is under taken.
17. Explain 5 pitfalls of acquisition.
18. Explain the method of determining the purchase consideration with suitable illustration on your own.
19. State the features of purchase method and polling method of accounting treatment of M & A of a firm with an illustration.

20. A firm can invest Rs.18, 00,000 in a certain project now to receive Rs.4, 00,000 per year for the next 10 years. The cost of
capital for this project is 14%. What is the NPV of the project? What is its IRR? How are NPV and IRR used as capital
budgeting decisions on mergers and acquisitions?

21. The free cash flow of a firm is projected to grow at a compound annual average rate of 35% for the next 5 years. Growth is
then expected to slow down to a normal 5% annual growth rate. The current year’s cash flow to the firm is Rs.4, 00,000.
The firm’s cost of capital during the high growth period is 18% and 12% beyond the fifth year, as growth stabilizes.
Calculate the value of the firm.

22. Company A proposes to acquire company B by offering two of its shares for every five shares of company B. Financial
data available are given below:
Market capitalization (Rs.) 10,000,000 10,000,000
PAT (Rs.) 2, 00,000 5, 00,000
P/E 50 20
EPS (Rs.) 2 2
MPS (Rs.) 100 40
No. of shares 1, 00,000 2, 50,000
For the combined company, after merger, find (i) EPS; (ii) P/E ratio; (iii) MPS; (iv) no. of shares; (v) total market
capitalization.

23. Grand Company Ltd. is being acquired by Gorgeous Co. Ltd., on a share exchange basis. The data extracted from the
companies are given below:
Gorgeous Grand
Determine: Profit after tax 65,00,000 25,00,000
Number of shares 12,00,000 10,60,000
Earnings per share 6.0 2.5
Price Earnings ratio 14.5 9.5
i) Pre-merger Market Value per share.
ii) The maximum exchange ratio Gorgeous Company should offer without the dilution of (a) EPS (b) Market value
per share.

24. A Ltd wants to acquire T Ltd by exchanging 0.5 of its shares for each share of T Ltd. The relevant financial data are as
follows.
A Ltd. T Ltd.
EAT Rs.18,00,000 Rs.3,60,000
Equity Shares outstanding 6,00,000 1,80,000
EPS Rs.3 Rs.2
P/E Ratio 10 7
Market price per share Rs.30 Rs.14

You’re required to determine


a) The number of equity shares required to be issued by A Ltd. for acquisition of T Ltd.
b) What is the EPS of A Ltd after the acquisition?
c) Determine the equivalent earnings per share of T Ltd.
d) What is the expected market price per share of A Ltd after the acquisition assuming its PE multiple
remains unchanged?
e) The market value of the merged firm.

25. PQ Ltd. wants to acquire MN Ltd. by exchanging its 1.6 shares for every share of MN. It anticipates to maintain the
existing P/E ratio subsequent to the merger also. The relevant financial data are furnished below:

PQ Ltd MN Ltd
Earnings after Tax (Rs) 15,00,000 4,50,000
Number of equity shares outstanding 3,00,000 75,000
Market price per share (Rs) 35 40
a) What is the exchange ratio based on market price?
b) What is pre-merger EPs and P/E for each company?
c) What is the P/E ratio used in acquiring MN?
d) What will be the EPs of PQ after the acquisition?
e) What is the expected market price per share of the merged company?

26. Alpha Leather Co. Ltd. is evaluating the possibility of acquiring Beta Leather Co. Ltd. The following are the data for two
companies:
Alpha Beta
Profit after tax 5,47,500 99,000
EPS 7.30 2.20
DPS 4.20 1.20
Number of shares 75,000 45,000
Total Market Capitalization 100,00,000 1,35,0000
a) Calculate the Price-Earnings ratio of both the companies before merger.
b) Beta Co. Ltd’s earnings and dividends are expected to grow at 7.5% without merger and at 10% with
merger.
Compute:
a) Gain from the merger
b) The cost of the merger if Beta Ltd., is paid cash of Rs.40 per share, and
c) The cost of merger if the share exchange ratio is 0.25.

27. XYZ company is considering merging with ABC Co. XYZ’s shares are currently traded at Rs.25, it has 2, 00,000 shares
outstanding, and its earnings after taxes amount to Rs.4, 00,000. ABC has 1, 00,000 shares outstanding; current market
price is Rs.12.5, and its earnings after taxes are Rs.1, 00,000. The merger will be effected by means of stock swap
(exchange). ABC has agreed to a plan under which XYZ will offer the current market value for ABC shares, (i.e., if XYZ
shares current market value is Rs.25 and that of ABC as Rs.12.5, the exchange ratio will be Rs.25/12.5=2).

i. What is the pre-merger EPS and P/E ratio of both the companies?
ii. If ABC’s P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ’s post-merger
EPS be?
iii. What must the exchange ratio be for XYZ’s pre and post-merger EPS to be the same?

28. ABC Ltd is planning to acquire XYZ Ltd. XYZ is full equity firm. The earnings after tax of XYZ Ltd during this year
amounted to Rs.50 crores and company paid dividends of Rs.40 crore. The earnings of XYZ are expected to grow at 25%
every year for the next five years; after which A will grow at 15% every year for another five years. The earnings are
expected to grow at a constant rate of 8% per annum for ever after 10 years from now. XYZ is expected to maintain the
current payout ratio. Compute the price that ABC should pay using dividend discount model. (Use a discount rate of
12%).

29. The following is the balance sheet of A Co., Ltd as on 31.03.2005.

Liabilities Amount Assets Amount


Share capital 5,00,000 Buildings 1,50,000
50,000 equity shares of
Rs.10/- each
General Reserve 1,70,000 Machinery 5,50,000
Profit and Loss A/c 30,000 Stock 80,000
12% Debentures of 1,00,000 Debtors 70,000
Rs.100/- each
Trade Creditors 15,000 Cash 15,000
8,65,000 8,65,000

Company B has agreed to purchase Company A at Rs.6, 61,500/- to be paid in fully paid equity shares of Rs.10/- each.

Prepare journal entries to close the books of accounts of A Ltd and also prepare the realization and equity share holder’s
account.

30. The W Co. Ltd., is absorbed by the U Co. Ltd., the consideration being:

 Assumption of the liabilities


 Discharge of the Debenture debt at a premium of 5% by the issue of 6% Debenture’s in U Co. Ltd.,
 Payment in cash of Rs.3 per share and exchange of 3 shares of Re.1 each. In U Co.Ltd., at an agreed value of Re.1.50
per share for every share in W Co. Ltd.,

31. The following is the Balance Sheet of W Co. Ltd., on the date of transfer:

Balance Sheet
Liabilities Amount Assets Amount
Share capital 3,00,000 Good will 25,000
60,000 share of Rs.5 each
General reserve 32,000 Land and Building 75,000
Profit and loss a/c 13,000 Plant and Machinery 2,20,000
Accident insurance fund 5,000 Patents 5,000
5% debentures 1,50,000 Patterns and drawings 2,500
Sundry creditors 20,000 Stock in trade 1,06,000
Sundry Debtors 45,000
Investments 5,000
Cash at bank 36,500
5,20,000 5,20,000

Close the books of W Co. Ltd., by passing the necessary journal entries.

32. The balance sheet of XYZ Co. Ltd as on 31st March (Current year) is as follows.

Liabilities Amount Assets Amount


Equity share capital 2,00,000 Plant & Machinery 2,50,000
10,000 shares
at Rs.20/- each
13% Debentures 1,00,000 Furniture & Fittings 5,000
Retained earnings 50,000 Inventories 90,000
Creditors 30,000 Debtors 25,000
Cash Balance 10,000
3,80,000 3,80,000

The company is to be absorbed by ABC Co., Ltd at the above date. The consideration for absorption is the discharge of
debentures at a premium of 10%, taking over the liability in respect of sundry creditors and a payment of Rs.14 in cash
and one share of Rs.10 in ABC Ltd at the Market value of Rs.16 per share in exchange for one share in XYZ Co., Ltd.
The cost of dissolution of Rs.10, 000 is to be met by the purchasing company. Inventories are expected to realize Rs.1,
00,000, and expected collections from debtors are Rs.20, 000.
Expected yearly benefits (CFAT) from the business of XYZ Ltd are Rs.1, 50,000 for five years. Assuming zero salvage
value of its fixed assets, and firms cost of capital at 14%. Comment on the financial soundness of the ABC’s decisions
regarding the merger.

33. The following is the Balance sheet of D Ltd on 31-12-00.

Liabilities Amount Assets Amount


Equity share capital of 4,00,000 Building 1,70,000
Rs.100/- each
General reserve 50,000 Plant & Machinery 4,00,000
Profit & Loss a/c 5,600 Investments 50,600
5% Debentures 2,50,000 Debtors 1,40,500
Creditors 1,28,700 Stocks 80,700
Proposed dividend 24,000 Cash at bank 16,500
8,58,300 8,58,300

D Ltd was absorbed by N Ltd on the following terms & conditions:-


N Ltd to assume:
 Assume all the liabilities and to acquire all assets except investments which were sold by D Ltd for Rs. 45,000.
 Discharge the debenture debt at a discount of 5% by issue of 7% debentures in N Ltd.
 Issue to shares of Rs. 60 each in N Ltd at Rs. 65 per share and pay Rs. 2 in cash to the shareholders of D Ltd in
exchange for one share in D Ltd.
 Pay the absorption cost of Rs. 1,500.
 D Ltd sold in the open market one fourth of the shares received from N Ltd at the average rate of Rs.63 per share.
 Pass the journal entries to record the above transactions in the books of D Ltd.

34. Describe in detail the various defensive tactics adopted by a firm to defend itself from a hostile takeover.
35. Discuss the defense mechanism used by the target company in case of takeover.
36. Briefly explain preventive anti-takeover defense measures undertaken by firms in case of hostile takeover.
37. Elucidate the legal procedures to be complied with as laid down in the Companies Act 1956, for mergers and acquisitions.
38. Discuss the salient features of SEBI takeover code. Do you agree that SEBI is successful in controlling the takeovers?