7/30/2019 PE Ratio Model

1/20

1

MERGERS AND ACQUISITIONS

PRICE EARNING RATIO VALUATION IN TERMS OF

Presented By:

Anurag

Ashutosh

Athar

Binish

Deepak

FaisalFaris

7/30/2019 PE Ratio Model

2/20

Mergers and Acquisitions

Definition of Merger

Combining of two business entities under common

ownership.

Or

Two firms coalesce and share resources in order to

realise a common goal.

But

One party almost always dominates so

2

7/30/2019 PE Ratio Model

3/20

Mergers and Acquisitions

Acquisition

One firm buys the assets or shares of another

Takeover implies the acquiring firm is largerthan the target

Reverse takeover if the target is larger than theacquirer

3

7/30/2019 PE Ratio Model

4/20

4

Mergers and Acquisitions

So why?

To Maximise Shareholders Wealth

Through- differences in stock market valuations

- dissemination of skills

- synergies (2+2= 5)

7/30/2019 PE Ratio Model

5/20

WHAT IS A P/E RATIO

AND WHY SHOULD COMPANY CARE?

7/30/2019 PE Ratio Model

6/20

What is the P/E Ratio?

The P/E ratio is the price per share of stockdivided by the earnings per share of stock

7/30/2019 PE Ratio Model

7/20

P/E Ratios

The P/E ratio is the amount of moneysomeone is willing to pay to get 1 ofearnings

It could be considered a popularity contest

In general - the faster a company is growing,the higher the P/E it will have

7/30/2019 PE Ratio Model

8/20

P/E Ratios

What is a good P/E or a bad P/E

It depends!!!!

Look at past history of P/E ratios Look at other companies in same industry

Look at average P/E for Nifty

Look at the prospects for the company

7/30/2019 PE Ratio Model

9/20

P/E Ratios

In general, the faster a company grows - thehigher the P/E ratio

As the growth of a company slows over time -the P/E ratios will usually come down

7/30/2019 PE Ratio Model

10/20

P/E Ratios

Different types of industries tend to havedifferent P/Es - even if the growth rates aresimilar

Part 3 of the Stock Selection Guide helps usdetermine the normal range of high and lowP/E

7/30/2019 PE Ratio Model

11/20

P/E Ratios

Dont buy a stock just because the P/E ratio islow

Do more research - try to discover why it islow

There may be bad news and it deserves to below

The future growth prospects are the realdriving force

7/30/2019 PE Ratio Model

12/20

P/E Ratios

There are 6 basic ways a company canincrease earnings Reduce costs

Raise prices

Open more stores/expand

Sell more in existing markets

Fix or sell losing operations

Lower taxes paid

7/30/2019 PE Ratio Model

13/20

ValuationPERatio

Helps in

7/30/2019 PE Ratio Model

14/20

EXERCISE

COMPANY A

NO. OF SHARES 2

LACS

MARKET VALUE PER

SHARE RS.25

EPS RS.3.125

COMPANY B

NO. OF SHARES 1 LAC

MARKET VALUERS.18.75

EPS RS.2.5

7/30/2019 PE Ratio Model

15/20

CONCLUSIONS

EXCHANGE AT EPS NO EFFECT ON EPSAFTER MERGER

EXCHANGE MORE THAN EPS RATIO COMPANY WITH LOWER EPS GAINS

IF LESS THAN EPS RATIO COMPANY WITH

HIGHER EPS BEFORE MERGER GAINS

7/30/2019 PE Ratio Model

16/20

PRICE EARNING RATIO APPROACH

COMPUTATION :

P/E RATIO = MP/EPS

EPS = EAT/NO. OF EQUITY SHARES MARKET PRICE = P/E (NO. OF TIMES) * EPS

7/30/2019 PE Ratio Model

17/20

EXAMPLE

PRE MERGER

SITUATION

FIRM A FIRM B

EAT 6,25,000 2,50,000

NO. OF SHARES 2,00,000 1,00,000

EPS 3.125 2.5

P/E RATIO(TIMES) 8 7.5

MARKET PRICE PER

SHARE(MPS)

25 18.75

TOTAL MARKET

VALUE (N*MPS) OR

(EAT*P/E RATIO)

50,00,000 18,75,000

7/30/2019 PE Ratio Model

18/20

POST MERGER SITUATION 1

(BASED ON CURRENT

MARKET PRICE

SITUATION 2

EXCHANE RATIO/ SWAP

RATIO (ASSUMING)

2.5:3.125=.8 1 : 1

EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000

NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,0

00

EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/

P/E RATIO

(ASSUMED TO BE THE

SAME)

8 7.5

MPS 3.125*8=25 21.825

TOTAL MARKET VALUE 70,00,000 65,47,500

7/30/2019 PE Ratio Model

19/20

CONCLUSION

FIRM WITH HIGHER P/E RATIO CANACQUIRE FIRM WITH LOWER P/E RATIOWHICH WILL INVARIABLY INCREASESMARKET VALUE AFTER MERGER

7/30/2019 PE Ratio Model

20/20

THANK YOU