Mergers, Acquisitions and Corporate Restructuring
What the exam tests
Mergers, acquisitions and corporate restructuring tests motives, synergy valuation, swap ratios, financing choices, takeover defences, demergers, buybacks and LBO mechanics.
Core rules
- Synergy = PV(combined firm) − [PV(A) + PV(B)]. It must exceed the premium paid for the deal to create value for the acquirer.
- Share swap ratio should reflect relative intrinsic values; EPS accretion alone is not value creation.
- Cash consideration transfers synergy to target shareholders up to the premium; stock consideration shares risk and synergy.
- Due diligence covers financial, tax, legal, operational and cultural issues; regulation may require approvals.
- Restructuring includes demergers, slump sale, buyback, capital reduction and debt restructuring; each has tax and regulatory consequences.
Worked example
A is worth ₹1,000 crore with 100 shares (₹10/share); B is worth ₹400 crore with 50 shares (₹8/share); synergy = ₹150 crore. Combined value = ₹1,550 crore. Value-based exchange ratio = 8/10 = 0.8 A shares per B share. New shares = 50 × 0.8 = 40; total shares = 140; post-merger value per share = 1,550/140 = ₹11.07. B’s shareholders receive 0.8 × 11.07 = ₹8.86 per share, sharing the synergy; A’s shareholders gain from ₹10 to ₹11.07.
Traps
Paying a premium greater than synergy; using pre-announcement market prices without control premium adjustments; ignoring debt assumed; confusing EPS accretion with NPV; overlooking stamp duty, tax and competition approvals.