L Ltd., is planning to acquire T Ltd., with the following data available for both the companies: L Ltd. T Ltd. Expected EPS 12 5 Expected DPS 10 3…

CA Final · Advanced Financial Management · RTP · November 2024
L Ltd., is planning to acquire T Ltd., with the following data available for both the companies: L Ltd. T Ltd. Expected EPS 12 5 Expected DPS 10 3 No. of Shares 30,00,000 18,00,000 Current Market Price of Share 180 50 As per an estimate T Ltd., is expected to have steady growth of earnings and dividends to the tune of 6% per annum. However, under the new management the growth rate is likely to be enhanced to 8% per annum without additional investment. You are required to: (i) Calculate the net cost of acquisition by L Ltd., if 60is paid for each share of T Ltd. (ii) If the agreed exchange ratio is one share of L Ltd., for every three shares of T Ltd., in lieu of the cash acquisition as per (i) above, what will be the net cost of acquisition? (iii) Calculate Gain from acquisition.

Suggested Answer and Working Notes:

(i) Net cost of acquisition shall be computed as follows: Cash Paid for the shares of T Ltd. (60x 18,00,000) = 10,80,00,000 Less: Value of T Ltd., as a separate entity (18,00,000 × ₹ 50) = 9,00,00,000 Net Cost of acquisition of Tall Ltd. = 1,80,00,000 (ii) Net Cost of acquisition in case of exchange of shares: Exchange ratio = 1 share of L Ltd for every 3 shares of T Ltd. Number of shares to be issued in L Ltd. (18,00,000/3) = 6,00,000 shares Total no. of shares in L Ltd. after merger (30,00,000 + 6,00,000) = 36,00,000 Calculation of cost of Equity of T Ltd. = D 1 /P 0 +g Growth rate under new management after acquisition = 8% Value of Merged company assuming perpetual growth Value of merged company (180x 30,00,000) + [₹ 3/ (0.12 - 0.08)] x 18,00,000 = 67,50,00,000 Value per share of merged company (₹ 67,50,00,000/36,00,000) = 187.50 per share Net cost of acquisition Gross cost of acquisition (6,00,000 x 187.50) = 11,25,00,000 Less: CMP (18,00,000 x 50) = 9,00,00,000 Net Cost of acquisition = 2,25,00,000 Alternatively, Net Cost of Acquisition can also be computed as follows: No. of shares issued to shareholders of T Ltd. in the ratio of 1:3 = 6,00,000 Existing price of one share of L Ltd. = 180 Value of consideration paid for acquisition of T Ltd. = 10,80,00,000 Less: Existing Value of T Ltd., as a separate entity = 9,00,00,000 Net Cost of acquisition of T Ltd. = 1,80,00,000 (iii) Calculation of gain from acquisition: Total Earnings of L Ltd. (12x 30,00,000) = 3,60,00,000 Total Earnings of T Ltd. (5x 18,00,000) = 90,00,000 Combined Earnings = 4,50,00,000 PE Ratio of L Ltd. (180/12) = 15 Value of L Ltd. after acquisition = 67,50,00,000 Less: Value of two companies separately L Ltd. (180x 30,00,000) = 54,00,00,000 T Ltd. (50x 18,00,000) = 9,00,00,000 = 63,00,00,000 Gain from Acquisition = 4,50,00,000

Topics: Mergers, Acquisitions and Corporate Restructuring

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