Unit 5
MBA/BBA/B.com /B.Tech /UGC Net
By
Dr. Anand Vyas
Mergers and Amalgamations
• According to Prof. L.H.Haney, merger is, “a form of
business organization which is established by the
outright purchase of the properties of constituents,
organizations and the merging or amalgamating of
such properties into a single business unit”.
• In a merger, one business unit acquires the other
business unit. The acquiring company retains its entity
while the acquired loses its entity.
• Merger and Amalgamation. A merger is where two or
more business entities combine to create a new
entity or company.
Acquisition
• An acquisition is when one company purchases
most or all of another company's shares to gain
control of that company. Purchasing more than
50% of a target firm's stock and other assets
allows the acquirer to make decisions about the
newly acquired assets without the approval of
the company's other shareholders.
•
• Horizontal mergers occur when two businesses in the
same industry combine into one. This type of
combination can cause anti-trust issues depending on
the industry. For instance, GM and Ford may not be
allowed to merge because of anti-trust laws.
• Vertical mergers occur when two businesses in the
same value chain or supply chain merge. For example a
hamburger restaurant might merge with a cow farm.
Exchange Ratio
In mergers and acquisitions (M&A), the share
exchange ratio measures the number of shares the
acquiring company has to issue for each individual
share of the target firm. For M&A deals that include
shares as part of the consideration (compensation)
for the deal, the share exchange ratio is an
important metric. Deals can be all cash, all shares,
or a mix of the two.
• The exchange ratio is the relative number of
new shares that will be given to existing
shareholders of a company that has been
acquired or that has merged with another
Synergy Benefits
• For the merger to benefit shareholders, there
should be cost-saving opportunities to offset
the revenue decline. In other terms, the
synergies deriving from the merger must
exceed the initially lost value. As a rule of
thumb, synergy is a business combination
where 2+2 = 5.
Post Merger EPS,
• Proforma earnings per share (EPS) is the calculation of EPS
assuming a merger and acquisition (M&A) takes place and all
financial metrics, as well as the number of shares outstanding, are
updated to reflect the transaction. “Pro forma” in Latin means “for
the sake of form.” In this case, it refers to calculating EPS “for the
sake of form” in the event of the acquisition.
• Basic EPS is calculated by dividing a firm’s net income by its
weighted shares outstanding. The pro forma EPS, on the other
hand, adds the target firm’s net income and any additional
synergies or incremental adjustments to the numerator, while
adding new shares issued due to the acquisition to the
denominator.
• Pro Forma EPS = (Acquirer’s Net Income + Target’s Net Income +/-
“Incremental Adjustments”) / (Acquirer’s shares outstanding + New
Shares Issued)
Post Merger Price of share,
• Accounting for Amalgamations
• The provisions of Accounting Standard (AS-14) on Accounting for
Amalgamations issued by the Institute of Chartered accountants of
India need to be referred to in this context.
• The two main methods of financing an acquisition are cash and
share exchange:
• Cash: This method is generally considered suitable for relatively
small acquisitions. It has two advantages:
• (i) The buyer retains total control as the shareholders in the selling
company are completely bought out.
• (ii) The value of the bid is known and the process is simple.
Required rate of return of merged
company,
• Return on investment
• Return on investment (ROI) is similar to ROE, except it
accounts for the acquisition price and the sale price of
a business. You calculate it by subtracting the sale price
from the acquisition price and dividing that difference
by the acquisition price; the result is a percentage. If
you acquire a company for $10 million and sell it for
$15 million, the ROI is 50 percent.
De-Merger.
• It has been defined as a split or division. As
the same suggests, it denotes a situation
opposite to that of merger. Demerger or spin-
off, as called in US involves splitting up of
conglomerate (multi-division) of company into
separate companies.
