Exchange ratio and synergy

Exchange ratio and synergy

1. GIDC RAJJU SHROFF ROFEL INSTITUTE OF MANAGEMENT STUDIES EXCHANGE RATIO & SYNERGY Submitted To:- DR. AABHA SINGHVI Submitted By :- JAINAB KHALIFA 21 ANJALI SINGH 64 KAJAL R. TIWARI 67 URVASHI TIWARI 68

2. SYNERGY Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers and acquisitions (M&A). Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger. Synergy can be reflected in increased revenues and/or lower expenses. For example, a company may acquire a similar firm, allowing it to expand its product offering and, as a result, increase its sales and revenues. This could not have been accomplished had the two firms remained independent.

3. TYPES OF SYNERGY

4. EXCHANGE RATIO & SYNERGY T he   Exchange R atio  measures the number of shares the acquiring company. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business . Large acquisition almost always involve an exchange of shares, in whole or in part. The advantage of this method of financing is that the acquirer does not part with cash and does not increase a financial risk by raising new debt.

5. SHARE EXCHANGE RATIO/SWAP RATIO The exchange ratio calculates how many shares an acquiring company needs to issue for each share an investor owns in a target company to provide the same relative value to the investor. The intrinsic value of the shares and the underlying value of the company are considered when coming up with an exchange ratio.

6. EXCHANGE RATIO In mergers and acquisitions (M&A), the exchange ratio measures the number of shares the acquiring company has to issue for each individual share of the target firm. For M&A deals that include shares as part of the consideration (compensation) for the deal, the share exchange ratio is an important metric. Deals can be all cash, all shares, or a mix of the two . Formula:- Exchange Ratio = Offer Price for Target’s Shares Acquirer’s Share Price

7. EXCHANGE RATIO EXAMPLE Assume Firm A is the acquirer and Firm B is the target firm. Firm B has 10,000 outstanding shares and is trading at a current price of $17.30 and Firm A is willing to pay a 25% takeover premium. This means the Offer Price for Firm B is $21.63. Firm A is currently trading at $11.75 per share. To calculate the exchange ratio, we take the offer price of $21.63 and divide it by Firm A’s share price of $11.75. The result is 1.84. This means Firm A has to issue 1.84 of its own shares for every 1 share of the Target it plans to acquire.

8. METHODS FOR CALCULATING EXCHANGE RATIO EPS MPS PE Ratio NAV Combined EPS Combined MPS Combined PE Minimum and Maximum Exchange Ratio based on MPS and EPS Market Value of Merged Firm

9. EPS Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value . Formula for calculation of EPS : EPS= Earnings available to equity share Total number of equity shares Formula for calculating exchange ratio based on EPS : Share Exchange Ratio= Earning Per Share of Acquired Company Earning Per Share of Acquiring Company

10. MPS The market price per share of stock usually termed simply “share price” is simply the rupee amount that investors are willing to pay for one share of the company’s stock. Formula for calculating exchange ratio based on MPS : Share Exchange Ratio= Market price of Acquired Company Market Price of Acquiring Company

11. P/E RATIO The price earning ratio is the relationship between a company’s earnings and its share price, and is calculated by dividing the current price per share by the earning per share. Formula for calculating PE ratio: P/E Ratio= Market Price per Share Earning Price per Share Formula for calculating exchange ratio based on the basis of PE Ratio: Share Exchange Ratio= P/E ratio of acquired company P/E ratio of acquiring company

12. NAV The net asset value is calculate when total external liabilities (including preference share capital) payable are deducted from total assets (excluding fictitious assets). NAV= Total Assets – Total External Liabilities Total Number of Equity Shares formula for calculating exchange ratio based on NAV: Share Exchange Ratio= NAV of Acquired Company NAV of Acquiring Company

13. COMBINED EPS Formula for combine EPS of a merged firm : Combined EPS= Total Earnings after Merger Total no. of Equity Share after Merger

14. COMBINE MPS Formula for combined MPS of a merged firm: Combined MPS= Total Market Value after Merger Total no. of Equity Share After Merger

15. COMBINE PE Formula for combined PE of a merged firm: Combined PE= MPS after Merger EPS after Merger

16. MEXIMUM EXCHANGE RATIO BASED O N MPS AND EPS FORMULA Maximum exchange ratio in terms of EPS EPS old = Earning of Acquirer + Earning of Target + Synergy Gain No. of share outstanding of Acquirer + (No. of shares outstanding of Target XER) Maximum exchange ratio in terms of MPS MPS old = Market value of acquirer + Market value of Target + Synergy Gain No. of share outstanding of Acquirer + (No. of shares outstanding of Target XER)

17. MINIMUM EXCHANGE RATIO BASED O N MPS AND EPS FORMULA Minimum exchange ratio in terms of EPS EPS old = Earning of Acquirer + Earning of Target + Synergy Gain*ER No. of share outstanding of Acquirer + (No. of shares outstanding of Target XER) Minimum exchange ratio in terms of MPS MPS old = Market value of acquirer + Market value of Target + Synergy Gain * ER No. of share outstanding of Acquirer + (No. of shares outstanding of Target XER)

18. MARKET VALUE OF MERGED FIRM Market value of both firm= market share of one company + market price per share of another company* [number of share of one company + number of share of another company earning ratio] OR Market value of both the firm= Market Value of one company + Market value of another company + synergy

19. SHARE EXCHANGE RATIO ADVANTAGES DISADVANTAGES A share for share exchange is the effect of relatively high price to earnings ratio of the bidding company on the earnings of the target company Capital gain tax is differed The share holders will still have a financial interest in the fortunes of the company that they have sold Equity share are being issued, and this is a comparatively expensive form of capital Share exchange may reduce the gearing of the group company at the time of purchase The effect on the share price of the increase in the number of share of the purchasing company is uncertain

20. COST AND BENEFITS OF A MERGER The benefit of merger can be define as the difference between the total benefits of a merger can be defined as the difference between the total present value of the merged firms and the sum of their values if they do not merge. If V represents a value, then Benefits = V= V AB – V A - V B Cost of merger is defined as the difference between the amount paid for the acquired firm and the amount it is worth as a separate entity. If B’s owner receive cash for there share, for eg . Then, Cost = Cash - V B

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