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Modern Pharma PDF

The document discusses a potential acquisition of Magnum Drugs by Modern Pharma. Modern Pharma identified the cardiovascular segment as a focus area for growth, and examined Magnum Drugs as a potential acquisition target in that segment. Financial statements for both companies are provided, with Modern Pharma having a PAT of Rs. 450 cr and Magnum Drugs having a PAT of Rs. 95 cr. Calculations are required to determine the optimal exchange ratio for the acquisition to benefit both shareholders.

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483 views2 pages

Modern Pharma PDF

The document discusses a potential acquisition of Magnum Drugs by Modern Pharma. Modern Pharma identified the cardiovascular segment as a focus area for growth, and examined Magnum Drugs as a potential acquisition target in that segment. Financial statements for both companies are provided, with Modern Pharma having a PAT of Rs. 450 cr and Magnum Drugs having a PAT of Rs. 95 cr. Calculations are required to determine the optimal exchange ratio for the acquisition to benefit both shareholders.

Uploaded by

PG-04
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1 

Modern Pharma
Modern Pharma is fairly diversified pharmaceutical company that has presence in most of
the therapeutic segments. It has grown at a healthy rate over the past fifteen years, thanks
to a balanced programme of internal growth and acquisitions.

In a recent strategy session, the management of Modern Pharma identified the


cardiovascular segment as a thrust area for the next few years. Though the company has a
reasonable presence in this segment, the management is keen on pursuing aggressive
growth opportunities in this segment, especially through acquisitions. On the advice of the
management, the business development group at the head office examined several
independent pharmaceutical companies with a primary focus on the cardiovascular
segment. This group looked at things like revenues, growth rate, profit margin, market
capitalization, attitude of incumbent management, and so on. Based on such analysis, it
zeroed in on Magnum Drugs as potentially suitable candidate for acquisition by Modern
Pharma.

Magnum Drugs is a two decade old company with a turnover of Rs.1520 cr last year.
Magnum has had a chequered history, with a general upward trend. The financial
statements of Modern Pharma and Magnum Drugs for last year are given in Exhibit 1 and
Exhibit 2.

The current market price per share of Modern Pharma is Rs.320 and the market price per
share for Magnum Drugs is Rs.102.

Required:

1. Calculate the exchange ratio that gives equal weightage to book value per share,
earnings per share, and market price per share.
2. If the merger is expected to generate a synergy gain of 5 percent, what is the
maximum exchange ratio Modern Pharma should accept to avoid initial dilution of
earnings per share?
3. What will be the post-merger EPS of Modern Pharma if the exchange ratio is 1:4?
4. What is the maximum exchange ratio acceptable to the shareholders of Modern
Pharma if the P/E ratio of combined entity is expected to be 13 and there is i) no
synergy gain ii) synergy gain of 2 percent?
5. What is the minimum exchange ratio acceptable to the shareholders of Magnum
Drugs under the above scenarios?
6. Assuming that there is no synergy gain, at what level of the P/E ratio there will be
common exchange ratio?
2 
 

Exhibit 1

Financial Statements of Modern Pharma

Prof and Loss Statement Balance Sheet

Rs.cr. Sources of Funds Rs.cr.


Sales 4840 Shareholders’ funds* 2300
PBDIT 960 Debt holders’ funds 300
Depreciation 250 Total 2600
PBIT 710 Uses of Funds
Interest 40 Net fixed assets 1650
PBT 670 Net current assets 700
Tax 220 Investments 250
PAT 450 Total 2600
*No of shares (FV Rs.10) : 20 cr

Exhibit 2

Financial Statements of Magnum Drugs

Rs.cr. Sources of Funds Rs.cr.


Sales 1520 Shareholders’ funds* 650
PBDIT 230 Debt holders’ funds 250
Depreciation 70 Total 900
PBIT 160 Uses of Funds
Interest 30 Net fixed assets 540
PBT 130 Net current assets 310
Tax 35 Investments 50
PAT 95 Total 900
No of shares (FV Rs.10): 10 cr

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