Professional Documents
Culture Documents
SWAP/Exchange ratio
The exchange ratio is the number of the acquirers shares that are offered for each share of the target. The number of shares offered depends on the valuation of the target by the acquirer. For example , in April 2006 . Alcatel and Lucent announced a stock for stock merger in which each Lucent shareholder would receive 0.1952 of an Alcatel share of Lucent they owned
Exchange ratio
For example , in May 2010 . ICICI Bank and Rajasthan Bank announced a stock for stock merger.
The boards of both banks approved the swap ratio at 1 : 4.72, meaning 25 new shares of ICICI to be issued for every 118 shares of BoR
6-3
Exchange ratio
Steps for determining SWAP ratio
1. To arrive at exchange ratio both the acquirer and the target conduct a valuation of the target.
2. From the above process the acquirer determines the maximum price it is willing to pay while the target determines minimum it is willing to accept .
Exchange ratio
price will depend on each partys other investment opportunities and relative bargaining abilities. 4 Based on the valuation of target , the acqurier determines the per share price it is offering to pay. 5 The exchange ratio is determined by dividing the per share offer price by the market price of the acquirers shares
6-5
1,00,00,000
20,00,000 5 50
P/E ratio
15
10
Example
Let us assume that based on valuation of dynamic , United Communication has determined that it is willing to offer Rs 65 per share of Dynamic . This is 30% premium above the pre merger price of Dynamic. In terms of Uniteds shares the Rs 65 offer is equivalent to Uniteds Rs 65/150 share SWAP RATIO = .43 :1
Example
Based on the preceding data , United can calculate the total number of shares that it is willing to offer to complete a bid for 100% of Dynamic The shares that United will issue : ((Offer price)(total outstanding shares of target))/price of acquirer or
Incase Dynamic rejects the offer and offer is revised to Rs 90 per share Exchange ratio Rs 90/Rs 150= .60 shares Rs 90/150 * 20,00,000 = 12,00,000 Premerger EPS Rs 10 Post merger EPS= 600,00,000/62.00,000= Rs 9.68
United communication s EPS declined the following the higher offer of Rs 90 . This is an example of dilution in EPS
6-10
Dilution in EPS
Dilution of EPS will occur any time the P/E ratio paid for the target exceeds the the P/E ratio of the company doing the acquiring. The P/E ratio paid is calculated by dividing the offer price by EPS of the target company This is as follows : P/E ratio Paid = Rs 65/Rs5= 13< 15
Rs 90/5 = 18 > 15
6-11
Practice questions
12
Question -1
Particulars Mani Ltd (Acquirer) Ratnam Ltd
(Target)
8,00,000
2,00,000
Rs
Rs
40,00,000
4,00,000
PE Ratio
10
1. What is the swap ratio based on current market prices? 2. What is the EPS of Mani Ltd after the acquisition? 3. What is the expected market price per share of Mani Ltd after the acquisition, assuming its PE Ratio is adversely affected by 10% ? 4. Determine the market value of the merged Company. 5. Calculate gain / loss for the shareholders of the two independent entities, due to the merger.
13
What is the swap ratio based on current market prices? Ratnam Mani Ltd Ltd Particulars (Acquirer) (Target) 1 2 Profit After Tax No. of Shares Rs Rs 40,00,000 8,00,000 4,00,000 2,00,000
3
4 5 6 7
PE Ratio
EPS (1 / 2 ) MPS ( 3 X 4) SWAP RATIO The shares that Mani Ltd will issue ( .2 X 2,00,000)= 40000
10
40,00,000
8,00,000
10.91 10X 10.91 9X 10.91 109.1X 4,40,000 109.10 98.19 4,80,04,000 4,40,00,000
15
2,00,00,000 50,00,000 4 64
16 12 Company B has agreed on an offer of Rs 35/- per share in common stock of company A 1.. Compute Swap ratio 2number of shares to be issued to company B by company A 3..Earning per share post merger of Company A 4.. What will be the earning per share post merger if the company B renegotiated the offer to Rs 50 per share
16
(a) A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.). Following information is provided:ltd A Ltd T Present earnings Shares outstanding Earning per share
18,00,000 6,00,000 3 30 10 3,60,000 1,80,000 2 14 7
1number of shares to be issued to T Ltd by A Ltd 2..Earning per share post merger of A Ltd 3. What I s the expected price per share of A ltd after the acquisition 4.Determine the market value of the merged firm
17
.5 X 1,80,000=90 000
18,00,000
3,60,000
21,60,000
6,90,000
X Ltd wants to taker over Y Ltd and the financial details are as follows
X Ltd Y Ltd
1,00,000 20000 2000 38000 15000 173000 122000 51000 173000 24000 24 4000 5000 61000 35000 26000 61000 15000 27 50,000
Equity Share capital Of Rs 10 each Preference Share capital Share Premium Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd
19
13.8 11.2 Worth per share of target firm / Worth per share of acquiring firm
0.8116 5000 0.812 5000*.812
4058
20
EPS of target firm/EPS of acquiring firm Rs3/Rs 2.4 1.25 5000 1.25 6250
21
(3) shares exchange ratio based on Market price Market price of Y ltd Market price of X ltd SWAP RATIO and No of shares 27 24 1.125 5000 5625
Shares issued on the basis of Net worth 4058 preferred by X ltd ( Acquirer) EPS 6250 MPS 5625
22
X Ltd wants to taker over Y Ltd and the financial details are as follows
X Ltd Y Ltd
100000 20000 50000
Equity Share capital Of Rs 10 each Preference Share capital Share Premium Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
2000
38000 15000 173000 122000 51000 173000 24000 24 4000 5000 61000 35000 26000 61000 15000 27
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd
23
Create a list of comparable companies, often industry peers, and obtain their market values. Convert these market values into comparable trading multiples, such as P/E, price-tobook, enterprise-value-to-sales and EV/EBITDA multiples. Compare the company's multiples with those of its peers to assess whether the firm is over or undervalued.
24