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A merger is a combination of two or morecompanies to form a new company, whilean acquisition is the purchase of onecompany by another in which no newcompany is formed.
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Horizontal Mergers
Between competing companies
Vertical Mergers
Between buyer-seller relation-ship companies
Conglomerate Mergers
Neither competitors nor buyer-seller
relationship.
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Calculating the value of the synergies
screening and shorlisting
Analyzing the post- acquisition financial
performance
Decision about payments whether in cash or stock
Deciding about the accounting method
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Synergy Effect
NAV= Vab (Va+Vb) P E
Where Vab = combined value of the 2 firms
Vb = market value of the shares of firm B.
Va = As measure of its own value
P = premium paid for B
E = expenses of the operation
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Financial synergy:
It is the apparent reduction in cost of capital
an increase in gearing or a diversification .
Operating synergy :
It states that economies of scale exist in
industry and that before a merger takesplace.
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Value of combined business is expected to be
more than value of the individual companies
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Value (A+B)Value (A+B)
Value A + Value BValue A + Value B
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8www.bizkul.com
Different experts have different classifications
of the various methods of valuation
Within these methods, there are sub-methods
Sometimes the methods overlap
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9www.bizkul.com
Book value
Replacement value
Liquidation value
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10www.bizkul.com
Historic l cost v lu tio
ll ss ts r t k t istoric lbook v lu .
V lu of oo will is to t is
bov fi ur to rriv t tv lu tio .
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11www.bizkul.com
Current cost valuation
All assets are taken at current value
and summed to arrive at valueThis includes tangible assets,
intangible assets, investments, stock,
receivables
VALUE = ASSETS - LIABILITIES
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12www.bizkul.com
Based on capital employed and
expected profits vs. actual profits
Based on number of years of super
profits expected
May be discounted at suitable rate
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13www.bizkul.com
Normal capitalisation method
Normal capital required to get actual return
less actual capital employedSuper profit method
Excess of actual profit over normal profit
multiplied by number of years super profitsare expected to continue
Annuity method
Discounted super profit at a suitable rate
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14www.bizkul.com
The value of the IA is from
Economic benefit provided
Specific to business or usage as different aspects
Accounting value
Economic valueTechnical value
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15www.bizkul.com
Depends on objective and can varywidely depending on purpose
For accounting purposes to show
in financial statementsFor acquisition/merger/investment
For management to understand
value of company for decisionmaking
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16www.bizkul.com
Often value paid in M&A deals is
more than market value/book
value. This could be:Partly due to over bidding due to
strategic reason (existing or
perceived) andPartly due to IA of company, not
captured in balance sheet
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Replacement value method
Cost of replacing existing business istaken as the value of the business
Liquidation value method Value if company is not a going
concern
Based on net assets or piecemeal
value of net assets
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No. of shares % of holding (hdfc) bank
Indian Promoters 82443000 23.28
Subtotal 82443000 23.28
Banks Fin. Inst.& Ins. 10068939 2.84
FIIs 94087619 26.57
Subtotal 116142534 32.80
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Other InvestorsPrivate Corporate Bodies 28598234 8.08
NRI's/OCB's/Foreign Others 6019811 1.70
Govt. 3841342 1.08
Others 78110019 22.06
Subtotal 116569406 32.92
General public 38920380 10.99
Grand total 354075320 100.00
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No. of shares % of holding
Face value 1.00
Non Promoters holding
Banks Fin. Inst.Ins. 1142025 0.06
FII's 501898631 26.80
Subtotal 512107247 27.34
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Other Investors
Private Corporate Bodies 782415732 41.77
NRI's/OCB's/Foreign Others 13299320 0.71
Directors/Employees 11080829 0.59
Others 287341856 15.34
Subtotal 1093907310 58.40
General public 266724046 14.24
Grand total 1872738603 99.99
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HDFC Bank Dec 2007 CBoP Dec 2007
Price swap ratio (Rs) 1,47551
Fully Diluted MCAP (M)524,658 112,158
Current P/BV (Dec-07) 4.65.7
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HDFC CBOP
BV Rs 333.9 11.8
EPS Rs 45.6 1.0
P/B (X) 4.4 4.3
P/E (X) 32.3 51.4
ROE % 17.7 10.6
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P/E (price to earning ratio) :-with the use
of this ratio an acquirer offer as a
multiple of, earning the target company is
producing.
E/V Sales(price to sales ratio) :-with this
ratio the acquiring company makes an
offer as a multiple of the revenues again,
while being aware of P/S ratio of other
companies in the industry .
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FY09E HDFC CBOP
BV Rs 382.8 12.8
EPS Rs 63.0 1.3
P/B (X) 3.9 4.0
P/E (X) 23.4 38.7
ROE % 17.6 10.9
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Discounted cash flow method
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Pre Merger status of ICICI
Liabilities = Rs 12,073 crore
Equity market capitalization = Rs 2466 crore
Equity volatility of 0.748
Assets worth Rs 13,249 crore with volatility 0.15
Assets were 9.7 % more than liabilities
Pre Merger status of Bank of Madura
Liabilities = Rs 4,444 crore
Equity market capitalization = Rs 100 crore
Equity volatility = 0.69
Assets are worth Rs 4,095 crore
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Current price of share = Rs 24.90
Growth rate (2000-2004)= 4%
Average return on equity = 12%
Annual depreciation rate (2000-2004) = 11%
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Sources of funds Rs. (Rs in crore)
Shareholders fund
Paid up capital 250
Reserves and Surplus 425 675Borrowed funds:
Secured 200
Unsecured 95 295
Capital employed 970
Uses of funds
Gross block 657
Less : depreciation 285
Net block 372
Investment 23
Current assets 753
Less :current liabilities 178
Net Current Assets
Net assets970
575
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Step 1: Determine Free Cash Flow
Free Cash Flow =
NOPAT + Depreciation - Capital Expenditure
Working Capital Investment
where ,
NOPAT = EBIT (1- tax rate)
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Revenues & Expenses
Sales growth = 5,6,7,8.
CoG = 66%
Depreciation
Dep 05 = 0.11(372+0.05x1780) = 51
Working capital changes
NWC to sales ratio is 34%
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Step 2: Estimate a suitable Discount Rate
Cost of capital = Ke*E/V + Kd(1-T)*D/V +Kp* P/V
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Outstanding debt = Rs 295 crore
Interest paid = Rs 30 crore
Current rate of borrowing = 15%
Cost of debt = 0.15(1-0.35) = 0.975 or 97.5%
Cost of equity = dividend yield + growth rate= 2.20/24.90+0.45x0.12
= 0.142 or 14.20%
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Amount(Rs in crore)
Weighted Cost Weight cost
Equity 622.50 0.68 0.142 0.097
Debt 295 0.32 0.0975 0.031
917.5 1.00 0.128
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Salvage value = NCF(1+g)/(k-g)
= 205(1+0.04)/(0.13-0.04)
= Rs 2369
Value per share = 1060/25 = Rs 42.40
(Rs in crore)
Excels value 1355
Less: debt 295
Value of excel shares 1060
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