CA Final - SFM -
Mergers and acquisitions
One of the important topics in SFM is Mergers and acquisitions. It carries around 15% to 20% marks.
In this post we are going to discuss the following:
- Meaning of Merger, Acquisition and Restructuring
- Concept of Synergy and paying a premium for it
- Takeover & defensive strategy
- Valuation of Business
- Acquisition for shares
The numericals from this chapter are basically related with either valuation, exchange ratio of shares, Earnings per share and financial restructuring. I'll be explaining the concepts in layman's terms, you shouldn't be using this in exams, its only for achieving clarity of concept and to enable us to discuss our views regarding the same.
The chapter starts with a brief intro of M&A.
Merger is a unification of two or more entities whereas in acquisition one entity buys out another. M&A is regulated by Companies Act and takeovers by SEBI. BIFR deals with restructuring of sick units. In Restructuring the rights of various stakeholders undergo a change.
Types of Merger:
A simple reading of the above mentioned types of mergers from study material is sufficient to provide clarity about it. [DIY - Do it Yourself]
Synergy Value of (A+B) > Value of A + Value of B
In simpler terms, if value of A is 100 & B is 50, the value of A&B combined can be 175 instead of 150. That extra 25 that you get as a result of the combination is synergy.
If this benefit of synergy is unique only to me, ie only a single person can benefit by such combination then he does not need to pay a hefty premium for such combination, he can pay just slightly above 150. But if there are other persons who can get the similar benefit by combination then one will need to pay closer to 175.
Valuation of Business/Shares
This is an inherently debatable topic as there are a number of methods which can be used to arrive at value of business.
- Earnings based Valuation
- Discounted Cash Flow/ Free Cash flow
- Cash to Create
- Capitalized Earning Method
- Chop Shop Method
- Market Based Valuation
- Asset Based Valuation
- Value of business is taken as the fair market value of assets or realizable value of assets
The important topic in the above mentioned method is Discounted Cash Flow method. So it advisable to read that from the study material or discuss the same with your friends to ensure you've a grip on the concept. Takeover This topic has some cool words which make the chapter interesting :P
Use the following words to show off before people who are not doing CA.
Takeovers can be hostile, where an acquirer goes after the target by making an offer to the shareholders of the target company.
Street Swap, Bear Hug, Strategic Alliance, Brand Power Defensive
Divestiture, Crown jewels, Poison Pill, Poison Put, Greenmail, White knight, White Squire, Golden Parachute, Pac Man defense
Just read the following once or twice from Study material and you'll easily understand it.
Reverse Takeover - When a bigger company is taken over by a smaller company it is a reverse takeover.
There are a few criterias to judge whether or not a takeover is a reverse takeover.
- Assets of Transferor Company > Assets of Transferee Company - Equity to be issued by Transferee Company exceeds its original share capital
Market Value = Earnings (Total) * Price per share/Earnings per share
Earnings Per Share (EPS) = Earnings (Total)/No. Of Shares
EPS after merger of Acquirer Company = Combined Earnings / No. Of Shares (Old + Newly issued for acquisition)
EPS after merger of Acquired Company = EPS after merger of acquirer company
* Exchange ratio PS - This article is not a substitute for Study material or reference book. It serves as a discussion paper & for revision purpose.
You can recall the points mentioned herein and see if you remember all of it and add points if you feel I have missed some of it! You can download my notes for the relevant Chapter on my blog - www.easyca.info