Arotech Industries Ltd. (A), a listed engineering major, are evaluating the acquisition of MedGen Labs Pvt. Ltd. (M), an unlisted pharmaceutical…

CA Final · Advanced Financial Management · PYQS · May 2026
Arotech Industries Ltd. (A), a listed engineering major, are evaluating the acquisition of MedGen Labs Pvt. Ltd. (M), an unlisted pharmaceutical laboratory. Financial parameters as of 31 March, 2025 are as follows: Particulars Arotech Industries (A) MedGen Labs (M) Profit After Tax (PAT) 6,000 crore 450 crore No. of Equity Shares 500 crore 5 crore P/E Ratio 30 x 1.2 x Industry Avg P/E Market Price / Standalone Fair Value 360.00 To be determined Additional Information: 1. Combined Entity: Post-merger PAT is estimated at 6,850 crore (including synergies). The expected P/E of the combined entity is 34x. 2. Synergy Value: The total synergy gain (increase in combined entity value over the sum of standalone values) is capped at 34,000 crore. 3. Settlement Offers (Per 1 share of MedGen): Offer 1 (Cash):4,000 (Premium of 5.82% over the standalone fair value of MedGen).Offer 2 (Hybrid Equity):1,000 Cash + Arotech shares (X) (Premium of 21.69% over standalone fair value).Offer 3 (Hybrid Debt):1,150 Cash + 5 Convertible Bonds of Arotech (Premium of 25.66% over standalone fair value). 4. Bond Terms (Arotech): Face Value - 500, 4-year term, 10% discount rate. Each bond converts into 2 Arotech shares or redeems at 680.24. You are required to: (i) Determine the annual post-merger synergies (PAT basis) and MedGen's standalone P/E ratio. (ii) Calculate the Industry Average P/E and MedGen's Standalone Fair Value per share. (iii) Solve for the number of Arotech shares (X) offered in Offer 2. (iv) Rank all three offers from MedGen's perspective assuming Arotech's share price has fallen to and remains at 330 at the time of settlement/conversion.

Suggested Answer and Working Notes:

(i) Annual Synergies and MedGen P/E Annual Post-Merger Synergies (PAT basis): Synergy PAT = Combined PAT - (PAT_ A+PAT_M) Synergy PAT = 6,850 - (₹ 6,000 +450) = 400 crore MedGen Standalone P/E Ratio: Using the Synergy Value cap: Total Fair Value (M) = Combined Value – Value A - Synergy Value Total Fair Value (M) = (6,850 Crores × 34) - (500Crores × 360) – 34,000 Crore = 18,900 crore MedGen P/E = Total Fair Value/PAT_ M = 18,900/450 = 42 x (ii) Industry Average P/E and Fair Value per share Industry Average P/E:Industry P/E = MedGen P/E/1.2 = 42/1.2 = 35Standalone Fair Value (SFV) per share: SFV_M = 18, 900 cr (Total Value) / 5 cr shares = 3,780.00 (iii) Number of Arotech Shares (X) in Offer 2 Value of Offer 2 per share:Value = 3,780(SFV) × 1.2169(Premium) = 4,599.88 or - 4,600.00Solving for X: 1,000(Cash) + X * 360 (Price_ A) = 4,599.88 or 4,600 360 X = 3, 600 or X = 10 shares Or Since - 1,000 cash is not the part of 4,599.88 or - 4,600 the number of shares to be exchanged can also be computed as follows: 4599.88 or 4600 = 12.78 i.e. 13 shares 360 (iv) Ranking of Offers at 330 Price Drop Revised Valuation of Arotech Convertible Bond: 1. Redeemable Value of the bond:680.24 2. Conversion Value: 2 shares x 330 = 660.00 Higher of above = 680.24. Revised Offer Values (Per MedGen Share): Offer Calculation at 330 Revised Value Rank Offer 3 1,150 Cash + (5 x 680.24) 4,551.20 1 Offer 2 1,000 Cash +(10x330) 4,300.00 2 Offer 1 Fixed Cash 4,000.00 3 Note: Offer 3 is the most beneficial as the convertible bonds maintain their value through conversion even at 330 and would still provide a "debt floor" of 680.24 even if the price fell much further, unlike Offer 2 which has no downside protection. Or (Based on 13 shares) Revised Offer Values (Per MedGen Share): Offer Calculation at 330 Revised Value Rank Offer 2 1,000 Cash +(13 x 330) 5,290.00 1 Offer 3 1,150 Cash + (5 x 680.24) 4,551.20 2 Offer 1 Fixed Cash 4,000.00 3

Topics: Mergers, Acquisitions and Corporate Restructuring

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