Business Finance Merger and Acquisitions

Question: Describe about the Business Finance for Merger and Acquisitions. Answer: Merger and Acquisition The nos. of total shares issued after the takeover is calculated by the following formula: No. of shares Issued = Total No. of acquiring company shares + (Total no. of acquired companys shares)/2 Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 B1=A1 B2=A2/2 B=B1+B2 The value of combined market capitalization is calculated as per the following: Combined Market Cap = (Market Cap of Acquiring Co. + Market Cap of Acquired Co.) + Synergistic Increment Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 B1=A1 B2=A2/2 B=B1+B2 Share Price $3.00 $6.00 C1 C2 Market Cap $1,500,000.00 $600,000.00 $2,100,000.00 D1=A1 X C1 D2=A2 X C2 D=D1+D2 Synergistic Increment $500,000 E Total Market Cap $2,600,000.00 The value of earnings per share of the combined entity is computed by using the following formula: EPS = [(Earnings of acquiring co.+ Earnings of acquired co.)+Synergistic Increment] / Total nos. of share outstanding after the takeover Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 Earnings $500,000 $200,000 $700,000 G1 G2 G=G1+G2 Synergistic Increment $100,000 H Total Earnings $800,000 I=G+H Earnings per Share 0.5 1 $1.45 J1 J2 J= I/B The formula of calculating market price per share in the combined entity is given below: MPS = Market Cap of Combined Entity / Total nos. of shares outstanding in the combined entity Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 B1=A1 B2=A2/2 B=B1+B2 Share Price $3.00 $6.00 C1 C2 Market Cap $1,500,000.00 $600,000.00 $2,100,000.00 D1=A1 X C1 D2=A2 X C2 D=D1+D2 Synergistic Increment $500,000 E Total Market Cap $2,600,000.00 F=D+E Market Price per shares $3 $6 $4.73 K1 K2 K=F/B The minimum exchange ratio, acceptable by the shareholders of T ltd., when there was no dilution of share prices, can be ascertained by the following formula: Exchange Ratio= Market Cap of Acquired co./[(Total Market Cap - Market Cap of Acquired co.)/Acquiring Co.s shares] : Acquired Cos. shares Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 B1=A1 B2=A2/2 B=B1+B2 Share Price $3.00 $6.00 C1 C2 Market Cap $1,500,000.00 $600,000.00 $2,100,000.00 D1=A1 X C1 D2=A2 X C2 D=D1+D2 Synergistic Increment $500,000 E Total Market Cap $2,600,000.00 F=D+E Earnings $500,000 $200,000 $700,000 G1 G2 G=G1+G2 Synergistic Increment $100,000 H Total Earnings $800,000 I=G+H Earnings per Share 0.5 1 $1.45 J1 J2 J= I/B Market Price per shares $3 $6 $4.73 Minimum Exchange Ratio for no dilution in total earnings 1.67 M = [G2/{(I-G2)/B1}] : A2 The minimum exchange ratio, acceptable by the shareholders of T ltd., when there was no dilution of earnings, can be ascertained by the following formula: Exchange Ratio= Earnings of Acquired co./[(Total Market Cap - Earnings of Acquired co.)/Acquiring Co.s shares] : Acquired Cos. shares Before Acquisition After Acquisition Exchange Ratio A Ltd. T Ltd. Combined Shares on Issue 500000 100000 A1 A2 Issue on Acquisition 500000 50000 550000 B1=A1 B2=A2/2 B=B1+B2 Share Price $3.00 $6.00 C1 C2 Market Cap $1,500,000.00 $600,000.00 $2,100,000.00 D1=A1 X C1 D2=A2 X C2 D=D1+D2 Synergistic Increment $500,000 E Total Market Cap $2,600,000.00 F=D+E Earnings $500,000 $200,000 $700,000 G1 G2 G=G1+G2 Synergistic Increment $100,000 H Total Earnings $800,000 I=G+H Earnings per Share 0.5 1 $1.45 J1 J2 J= I/B Market Price per shares $3 $6 $4.73 K1 K2 K=F/B Minimum Exchange Ratio for no dilution in share price 1.5 L = [D2/{(F-D2)/B1}] : A2 Bibliography: Anderson, Hele?n, Virpi Havila and Fredrik Nilsson,Mergers, Acquisitions, And Stakeholders(Taylor and Francis, 2012) Nussbaum, Andrew J, Charles Martin and Simon Perry,Mergers Acquisitions(Thomson Reuters, 2012)