Mergers, Acquisitions and Corporate Restructuring: formula sheet

Key formulas

Synergy

Synergy = Value of combined firm − (Value of A + Value of B)

Positive synergy is the economic case for a merger. Value comes from higher revenue, lower costs or lower cost of capital.

Gain to acquirer

Gain to acquirer = Synergy − Premium paid

Premium = Price paid − Standalone value of target. If premium exceeds synergy, the acquirer's shareholders lose.

Gain to target

Gain to target shareholders = Premium paid

Premium over the target's pre-deal market or intrinsic value.

Slump sale consideration

Gain on slump sale = Lump sum consideration − Net worth of undertaking

The price is a lump sum with no separate values for items. The consideration may be cash or shares, so a slump sale is a divestiture only when the seller sells to an outside party for cash. Net worth (s.50B) = aggregate value of total assets (depreciable assets at WDV, other assets at book value, ignoring revaluation) − liabilities. The gain is a long-term capital gain if the undertaking was held for more than 36 months, otherwise a short-term capital gain.

Demerger share entitlement

Shares issued to each holder = Shares held × Entitlement ratio

The ratio is stated in the scheme, such as 1 resulting company share for every 2 shares held.

Synergy (value gain)

Synergy = V(AB) − [V(A) + V(B)]

V(AB) is the value of the combined firm. Use the same valuation basis for all three values.

Gain to acquirer (NPV of merger)

Net gain to acquirer = Synergy − Premium paid, where Premium = Price paid − V(B)

V(B) is the standalone value of the target. Merger is worthwhile for the acquirer only if this is positive.

Gain to target shareholders

Gain to target = Price paid − V(B)

This equals the premium. Synergy is shared: Synergy = Gain to acquirer + Gain to target.

Value of combined firm

V(AB) = V(A) + V(B) + Synergy

Rearranged form, used when synergy is given as a PV of extra cash flows.

Classification rule

Same business = horizontal; supply chain = vertical; related business = congeneric; unrelated = conglomerate

Decide by the business link, not by the size of the firms.

Earnings capitalisation value

Value = Maintainable PAT ÷ Capitalisation rate (ke)

Use PAT for equity value. Use PBIT (or NOPAT) with the overall rate for firm value. Adjust earnings for non-recurring items first.

P/E method

Value of equity = Maintainable earnings × P/E multiple

Use the P/E of a comparable or industry firm. P/E = Market price per share ÷ EPS.

Net asset value

NAV = Fair value of assets − Outside liabilities (including preference capital if asked)

Exclude fictitious assets such as preliminary expenses and accumulated losses. Per-share NAV = Equity NAV ÷ number of shares.

DCF firm value

Value = Σ FCFt ÷ (1 + k)^t + Terminal value ÷ (1 + k)^n

k is WACC for FCFF. Use cost of equity for FCFE.

Terminal value (constant growth)

TV = FCF(n+1) ÷ (k − g) = FCFn × (1 + g) ÷ (k − g)

Valid only when k > g. Discount TV by the factor of year n.

Value of synergy

Synergy = V(AB) − [V(A) + V(B)]

A is the acquirer, B is the target. V(AB) is the combined firm's value.

Gain to acquirer and premium

Premium = Price paid − Standalone value of target; Gain to acquirer = Synergy − Premium

Gain to target shareholders equals the premium.

NPV of merger (cash deal)

NPV to acquirer = (V(AB) − V(A)) − Cash paid

V(AB) − V(A) is the value the acquirer gets from the target including synergy.

Exchange ratio (EPS basis)

ER = EPS of target ÷ EPS of acquirer

Leaves the acquirer's EPS unchanged at the combined level, apart from synergy.

Exchange ratio (market price basis)

ER = MPS of target ÷ MPS of acquirer

Gives target holders the same market value at pre-merger prices. A premium, if stated, is added to the target price first.

Exchange ratio (book value basis)

ER = Book value per share of target ÷ Book value per share of acquirer

Book value per share = net worth ÷ number of equity shares.

Exchange ratio (intrinsic value basis)

ER = Intrinsic value per share of target ÷ Intrinsic value per share of acquirer

Use the values given, or compute them from the valuation method stated.

Weighted average ratio

ER = Σ (weight × ER on each basis)

Use only when the question gives weights or asks for a combined ratio.

New shares issued

New shares = Target shares × ER

Keep fractions until the end, then round only the final answer.

Post-merger EPS

EPS = (Earnings of A + Earnings of B + synergy) ÷ (Shares of A + New shares)

Use after-tax earnings available to equity holders.

EPS accretion or dilution

Change = Post-merger EPS − Acquirer's old EPS

Positive means accretion, negative means dilution.

Equivalent EPS of target holder

Equivalent EPS = Post-merger EPS × ER

Compare with the target's old EPS.

Post-merger market price

Price = Post-merger EPS × Post-merger P/E

If no P/E is given, state your assumption, usually the acquirer's old P/E.

Value to target holder per old share

Value = ER × Post-merger price

Compare with the target's old market price for the gain or loss.

Benefit (synergy) of merger

Benefit = PV of combined firm (A+B) − (PV of A + PV of B)

PV means standalone or combined value of the firm. Use market value if given, otherwise the DCF or P/E value the question supplies.

Cost of merger: cash offer

Cost = Cash paid − PV of B

This equals the premium paid to B's shareholders. It does not depend on the synergy.

Cost of merger: stock offer

Cost = x × PV of combined firm − PV of B

x is B's share of the combined firm, which equals new shares issued to B ÷ (A's old shares + new shares issued).

NPV to acquirer

NPV to A = Benefit − Cost

Accept the merger if NPV to A is positive. Equivalent check: value of A's holding after the deal − PV of A.

Gain to target shareholders

Gain to B = Cost (as defined above) = Value received − PV of B

Under cash this is the premium. Under stock the value received is x × combined value.

Value to acquirer shareholders

Cash: PV of combined − Cash paid. Stock: (1 − x) × PV of combined

Subtract PV of A to get the NPV to A. Divide by A's shares for the value per share.

Break-even limits

Max cash price = PV of B + Benefit. Max stock share x = (PV of combined − PV of A) ÷ PV of combined

Beyond these limits, NPV to the acquirer turns negative.

Open offer trigger: substantial acquisition

Acquirer with persons acting in concert crosses 25% of voting rights → open offer

Applies to acquiring shares or voting rights that take the holding to 25% or more. Always check the facts for the combined holding with persons acting in concert.

Open offer trigger: change of control

Acquisition of control, whatever the shareholding → open offer

Control can pass without crossing 25%, for example through the right to appoint a majority of directors.

Creeping acquisition limit

Holding between 25% and 75% → can add up to 5% in a financial year without an open offer

Applies to an acquirer who already holds 25% or more but not more than the maximum permitted non-public holding of 75%.

Minimum open offer size

Open offer size ≥ 26% of the total shares of the target company

This is the minimum size of the open offer under the SEBI (SAST) Regulations, 2011. It is a percentage of the target's total shares.

Takeover cost after a poison pill

Dilution factor = shares after rights issue ÷ shares before rights issue

Use it to show how the acquirer's percentage holding falls: new holding % = acquirer shares ÷ total shares after the issue.

Sources and uses

Total sources (debt + equity) = Total uses (purchase price + fees and expenses)

Equity is usually the balancing figure after debt is raised.

Debt-to-equity or leverage share

Debt % = Total debt ÷ Total funding × 100

Shows how highly leveraged the buyout is.

Interest cover

Interest coverage = EBIT ÷ Interest

Higher is safer. Lenders set a minimum.

Debt service coverage ratio (DSCR)

DSCR = Cash flow available for debt service ÷ (Interest + Principal repayment)

Below 1 means the debt cannot be serviced from cash flow.

Exit equity value

Exit equity = Exit enterprise value − Net debt at exit

Net debt = debt − cash. Debt falls as it is repaid.

Money multiple

Multiple = Exit equity ÷ Initial equity invested

Ignores timing.

IRR on equity (single exit, no interim cash)

IRR = (Exit equity ÷ Initial equity)^(1 ÷ n) − 1

n = years held. With interim cash flows, find the rate that makes NPV zero.

Exchange ratio

Exchange ratio = Value per share of target ÷ Value per share of acquirer

Use the same basis for both (market price, earnings-based or net asset value). The ratio is the number of acquirer shares per one target share.

Shares to be issued in a merger

New shares issued = Target shares held × Exchange ratio

Round per shareholder only if the question says so. Fractions are often settled in cash.

Share entitlement in a demerger

Resulting company shares received = Shares held in demerged company × Entitlement ratio

A ratio of 1:2 means 1 new share for every 2 held, so multiply by 1/2.

Net assets transferred in a demerger

Net assets transferred = Assets of undertaking − Liabilities of undertaking

Include only the liabilities that relate to the undertaking, as the scheme states.

Goodwill or capital reserve (acquisition method)

Goodwill (negative = bargain purchase) = Consideration − Fair value of net identifiable assets acquired

If the result is negative, first reassess the identification and measurement of the assets acquired and liabilities assumed. If a bargain purchase gain still remains, Ind AS 103 recognises it in other comprehensive income and accumulates it in equity as capital reserve where there is clear evidence that the acquisition is a bargain purchase. If there is no clear evidence, it is recognised directly in equity as capital reserve, with no OCI route. Check the question's instruction.

Value neutrality in a demerger

Pre-demerger price per share = Post-demerger price per share + Entitlement ratio × Resulting company price per share

Use this to find the implied price of the new share, or to check the given prices.

Post-merger EPS

Post-merger EPS = (Earnings of acquirer + Earnings of target) ÷ (Acquirer shares + New shares issued)

Add synergy to earnings only when the question gives it.

Balance sheet check

Total assets = Share capital + Reserves + Liabilities

Check this at the end of every restructuring answer.

Quick revision

• Synergy value = value of combined firm − (value of acquirer + value of target), both as standalone values.
• Horizontal merger joins firms in the same line, vertical joins different stages of one chain, conglomerate joins unrelated businesses.
• Exchange ratio by market price = target market price ÷ acquirer market price; by EPS = target EPS ÷ acquirer EPS. The EPS basis gives the same result as the market-price basis only when the two firms' P/E ratios are equal. If the P/E ratios differ, the two ratios differ, so use the basis the question specifies.
• New shares issued = target shares × exchange ratio. The ratio is applied to the target's shares to get the new acquirer shares.
• Post-merger EPS = combined earnings ÷ (acquirer shares + new shares issued).
• Compare post-merger EPS with the acquirer's old EPS to check EPS accretion or dilution.
• Gain to target shareholders = value received − their standalone value; the premium is the price paid above standalone market value.
• In a cash offer, the acquirer bears the risk and keeps the synergy remaining after paying the premium; target shareholders get a fixed price (the premium captures part of the synergy up front) and no share in any further upside or downside from the combined firm. In a stock offer, both sides share the synergy and the risk.
• Net benefit to acquirer in a cash deal = synergy − premium paid.
• Takeover defences include poison pill, white knight, greenmail and golden parachute; know what each does.
• In a leveraged buyout, the target's assets and cash flows support the acquisition debt, so check debt servicing capacity.
• In a demerger, shareholders of the original company get shares in the new entity; the total value should be checked before and after.

Common mistakes

• Treating merger and takeover as the same thing. Fix: A merger combines entities into one. A takeover transfers control, and the target may continue as a separate company.
• Saying shareholders receive shares in a divestiture. Fix: In a divestiture the selling company receives cash or consideration. In a demerger or spin-off, shareholders receive shares.
• Calling a merger vertical just because the companies are in the same industry. Fix: Vertical needs a supplier-customer link. Direct competitors at the same stage are horizontal.
• Confusing congeneric with conglomerate. Fix: Congeneric has a related business, customers or technology. Conglomerate has no relation at all.
• Discounting the terminal value by year n+1 instead of year n. Fix: The Gordon formula gives value at the end of year n. Discount it with the year n factor.
• Using WACC to discount equity cash flows or ke to discount firm cash flows. Fix: Match rate to cash flow. FCFF with WACC gives firm value. FCFE with ke gives equity value.
• Inverting the ratio, writing acquirer ÷ target. Fix: Target is always on top. The ratio can be above or below 1, depending on the per-share values.
• Using old share count of the acquirer for post-merger EPS. Fix: Always compute new shares = target shares × ER and add them before dividing earnings.
• Using the offer price as the cost without deducting the target's standalone value. Fix: Always write Cost = value given to B − PV of B. The cost is the premium, not the price.
• Calculating the stock-offer cost with B's standalone value or old EPS-based share instead of B's share of the combined firm. Fix: For stock, first find x from new shares ÷ total shares after the deal, then multiply x by the combined value.

Exam tips

• For difference questions, write a two-column style answer using bullets: who receives consideration, whether the parent survives, and the purpose.
• In case MCQs, spot the key words: lump sum, going concern, in proportion to holdings, managers, borrowed funds.
• In written answers, name the form first, define it in one line, then link the motive to facts in the case.
• Keep the numbers section tidy: show net worth and premium workings, since marks are given for steps.
• In case-scenario MCQs, decide the type from the business link first. Option wording often tries to trap you between congeneric and conglomerate.
• For theory answers, give a definition, an example and the synergy type for each merger type. This pattern earns marks quickly.
• In numerical questions, show synergy, premium and acquirer's gain as separate lines so partial marks are safe.
• Always end with a verdict on whether the acquirer should proceed, based on net gain, and mention one risk.