Valuation+of+Firms+in+Mergers+and+Acquisitions by Suman

8/8/2019 Valuation+of+Firms+in+Mergers+and+Acquisitions by Suman

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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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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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Book value

Replacement value

Liquidation value


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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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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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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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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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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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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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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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Valuation+of+Firms+in+Mergers+and+Acquisitions by Suman

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