Mergers, Acquisitions and Corporate Restructuring
This domain tests synergy valuation, exchange ratios, financing choice between cash and stock, accretion/dilution, and post-merger ownership mathematics.
Core mechanics
Synergy = V(AB) − [V(A) + V(B)] and sets the maximum premium payable. The exchange ratio on a market basis = offer price per target share / acquirer's market price. Post-merger EPS = combined earnings / (acquirer shares + new shares issued). Accretion or dilution is measured against the acquirer's standalone EPS, but accretion is not value creation - value depends on the premium paid relative to synergy.
Restructuring
Demerger (spin-off or mirror-image), slump sale, capital reduction, buyback (tender versus open market), divestment and debt restructuring. Each carries tax and regulatory consequences, including NCLT scheme approval and conditions for carrying forward losses.
Worked example
A: PAT ₹100 crore, 20 crore shares, EPS ₹5, price ₹100 (P/E 20), value ₹2,000 crore. B: PAT ₹40 crore, 10 crore shares, EPS ₹4, price ₹60 (P/E 15), value ₹600 crore. Synergy ₹200 crore; combined value ₹2,800 crore. At the market ratio 0.6, A issues 6 crore shares; total 26 crore; EPS = 140/26 = ₹5.38, accretive. If B's shareholders are given half the synergy (₹100 crore), they need ₹700 crore, i.e. ₹70 per B share, a ratio of 0.70; A issues 7 crore shares, total 27 crore, EPS = 140/27 = ₹5.19 - still accretive, but A keeps less of the gain.
Traps
Using book values; quoting EPS accretion as success; computing the exchange ratio on pre-announcement prices while ignoring synergy sharing; omitting transaction and integration costs; forgetting that a share-financed deal dilutes ownership even where EPS rises.