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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

Firm A (market value ₹600 crore) acquires Firm B (standalone market value ₹200 crore) by merger. Combined value after merger is expected to be ₹850 crore. A pays B's shareholders ₹230 crore in cash. What is the net gain to A's shareholders?

The net gain to A's shareholders is ₹20 crore. Synergy is ₹850 crore less ₹800 crore, i.e. ₹50 crore, and A pays a ₹30 crore premium over B's ₹200 crore value. The gain left for A is ₹50 crore minus ₹30 crore.

  1. A₹20 croreCorrect
  2. B₹50 crore
  3. C₹30 crore
  4. D₹80 crore
  5. ₹0

Explanation

Synergy gain = 850 - (600+200) = ₹50 crore. A pays a premium of 230 - 200 = ₹30 crore to B's shareholders. Net gain to A = 50 - 30 = ₹20 crore. Check: A's shareholders end with 850 - 230 cash paid = ₹620 crore versus ₹600 crore before, gain ₹20 crore. The ₹30 crore answer is just the premium and ₹50 crore ignores the premium.

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