Swap Ratio 19f40
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SWAP RATIO Merger and Acquisitions
SWAP/Exchange ratio »The exchange ratio is the number of the acquirer’s shares that are offered for each share of the target. »The number of shares offered depends on the valuation of the target by the acquirer. »For example , in April 2006 . Alcatel and Lucent announced a stock for stock merger in which each Lucent shareholder would receive 0.1952 of an Alcatel share of Lucent they owned
Exchange ratio »For example , in May 2010 . ICICI Bank and Rajasthan Bank announced a stock for stock merger.
»The boards of both banks approved the swap ratio at 1 : 4.72, meaning 25 new shares of ICICI to be issued for every 118 shares of BoR
6-3
Exchange ratio Steps for determining SWAP ratio
1. To arrive at exchange ratio both the acquirer and the target conduct a valuation of the target. 2. From the above process the acquirer determines the maximum price it is willing to pay while the target determines minimum it is willing to accept .
3. Within this range , the actual agreement
Exchange ratio price will depend on each party’s other investment opportunities and relative bargaining abilities. 4 Based on the valuation of target , the acqurier determines the per share price it is offering to pay. 5 The exchange ratio is determined by dividing the per share offer price by the market price of the acquirer’s shares
6-5
United Dynamic Communications Entertainment (Acquirer) (Target)
Net Income (PAT) 5,00,00,000
1,00,00,000
Share outstanding
20,00,000
50,00,000
Earning per share 10
5
Stock price
150
50
P/E ratio
15
10
Example »Let us assume that based on valuation of dynamic , United Communication has determined that it is willing to offer Rs 65 per share of Dynamic . This is 30% above the pre merger price of Dynamic. »In of United’s shares the Rs 65 offer is equivalent to United’s Rs 65/150 share »SWAP RATIO = .43 :1
Example »Based on the preceding data , United can calculate the total number of shares that it is willing to offer to complete a bid for 100% of Dynamic »The shares that United will issue : »((Offer price)(total outstanding shares of target))/price of acquirer or
»(Swap ratio )(total outstanding shares of target) »(Rs 65)(20,00,000)/Rs 150= 866666.67
Earning per share of surviving company »Calculating the EPS of the surviving company reveals the impact of the merger on the acquirer’s EPS »Combined earning = 6,00,00,000
»Total share outstanding = 50,00,000 +866666.67 = 58,66,666.67 »United communication ‘s impact on EPS Premerger EPS = Rs 10, post merger Rs 600,00,000/58,66,667 =10.23 This is an example of accretion in EPS (EPS accretive)
»Incase Dynamic rejects the offer and offer is revised to Rs 90 per share »Exchange ratio Rs 90/Rs 150= .60 shares »Rs 90/150 * 20,00,000 = 12,00,000 »Premerger EPS Rs 10 »Post merger EPS= 600,00,000/62.00,000= Rs 9.68
»United communication ‘s EPS declined the following the higher offer of Rs 90 . This is an example of dilution in EPS 6-10
Dilution in EPS »Dilution of EPS will occur any time the P/E ratio paid for the target exceeds the the P/E ratio of the company doing the acquiring. »The P/E ratio paid is calculated by dividing the offer price by EPS of the target company This is as follows : » P/E ratio Paid = Rs 65/Rs5= 13< 15
Rs 90/5 = 18 > 15
6-11
Practice questions
12
Question -1 Mani Ltd (Acquirer)
Particulars
Ratnam Ltd
(Target)
Profit After Tax
Rs
40,00,000
8,00,000
No. of Shares
Rs
4,00,000
2,00,000
PE Ratio
10
5
1. What is the swap ratio based on current market prices? 2. What is the EPS of Mani Ltd after the acquisition? 3. What is the expected market price per share of Mani Ltd after the acquisition, assuming its PE Ratio is adversely affected by 10% ? 4. Determine the market value of the merged Company. 5. Calculate gain / loss for the shareholders of the two independent entities, due to the merger. 13
What is the swap ratio based on current market prices? Ratnam Mani Ltd Ltd Particulars (Acquirer) (Target) 1
Profit After Tax
Rs
40,00,000 8,00,000
2
No. of Shares
Rs
4,00,000 2,00,000
3
PE Ratio
4 5 6
EPS (1 / 2 ) MPS ( 3 X 4) SWAP RATIO The shares that Mani Ltd will issue ( .2 X 2,00,000)= 40000
7
10
5
10 4 100 20 20/100= .2 :1 40,000 14
What is the EPS of Mani Ltd after the acquisition?
Profit after tax
MANI LTD RATNAM LTD
COMBINED
40,00,000
48,00,000
8,00,000
No. of Shares (4,00,000+40000)
4,40,000
EPS post merger
10.91
Expected price of Mani Ltd post merger as same PE ratio
10X 10.91
109.10
Expected price of Mani Ltd post merger as 10% less PE ratio
9X 10.91
98.19
Market Value of New Company
109.1X 4,40,000
4,80,04,000
Market value of both the companies before merger
4,40,00,000 15
Company A will acquire company B with shares of common stock Company A
Present earnings Shares outstanding Earning per share
Price per Share
Company B
2,00,00,000
50,00,000
50,00,000
20,00,000
4
2.5
64
30
PE Ratio
16 12 Company B has agreed on an offer of Rs 35/- per share in common stock of company A 1.. Compute Swap ratio 2…number of shares to be issued to company B by company A 3..Earning per share post merger of Company A 4.. What will be the earning per share post merger if the company B renegotiated the offer to Rs 50 per share
16
(a) A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.). Following information is provided: A Ltd T ltd Present earnings
18,00,000
3,60,000
6,00,000
1,80,000
3
2
Price per Share
30
14
PE Ratio
10
7
Shares outstanding Earning per share
1…number of shares to be issued to T Ltd by A Ltd 2..Earning per share post merger of A Ltd 3. What I s the expected price per share of A ltd after the acquisition 4.Determine the market value of the merged firm
17
What is the EPS of A ltd after the acquisition? A LTD
B LTD
The shares that A Ltd will issue
.5 X 1,80,000=90 000
Profit after tax
18,00,000
3,60,000
COMBINED
21,60,000
No. of Shares (6,00,000+90000)
6,90,000
EPS post merger
3.13
Expected price of Mani Ltd post merger as same PE ratio
10X 3.13
31.30
Market Value of New Company
31.3X 6,90,000
2,15,97000
Market value of both the companies before merger
2,05,20000 18
X Ltd wants to taker over Y Ltd and the financial details are as follows X Ltd
Equity Share capital Of Rs 10 each Preference Share capital Share Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
Y Ltd 1,00,000
50,000
20000 2000 38000
4000
15000
5000
173000
61000
122000
35000
51000
26000
173000
61000
24000
15000
24
27
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd 19
Share Exchange Ratio based on Net Asset Value : (1)
X Ltd
Y Ltd
Total Assets
173000
61000
Debentures
15000
5000
Preference Share Capital
20000
0
Total liabilities
35000
5000
138000
56000
10000
5000
Net Worth No of Shares
Net Worth per share Share Exchange ratio Share Exchange ratio = No of shares to be issued
13.8 11.2 Worth per share of target firm / Worth per share of acquiring firm 0.8116 5000
0.812
5000*.812
4058
20
(2) Share exchange ratio based on EPS Earning
24000
15000
No of Shares
10000
5000
2.4
3
EPS Share exchange ratio
EPS of target firm/EPS of acquiring firm
Share Exchange ratio
Rs3/Rs 2.4
No of shares
1.25
1.25 5000
6250
21
(3) shares exchange ratio based on Market price Market price of Y ltd
27
Market price of X ltd
24
SWAP RATIO and No of shares
1.125 5000 5625
Shares issued on the basis of Net worth 4058 preferred by X ltd ( Acquirer) EPS 6250 MPS 5625
22
X Ltd wants to taker over Y Ltd and the financial details are as follows X Ltd
Equity Share capital Of Rs 10 each Preference Share capital Share Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
Y Ltd 100000
50000
20000
2000 38000
4000
15000
5000
173000
61000
122000
35000
51000
26000
173000
61000
24000
15000
24
27
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd 23
»Create a list of comparable companies, often industry peers, and obtain their market values. »Convert these market values into comparable trading multiples, such as P/E, price-tobook, enterprise-value-to-sales and EV/EBITDA multiples. »Compare the company's multiples with those of its peers to assess whether the firm is over or undervalued.
24
SWAP/Exchange ratio »The exchange ratio is the number of the acquirer’s shares that are offered for each share of the target. »The number of shares offered depends on the valuation of the target by the acquirer. »For example , in April 2006 . Alcatel and Lucent announced a stock for stock merger in which each Lucent shareholder would receive 0.1952 of an Alcatel share of Lucent they owned
Exchange ratio »For example , in May 2010 . ICICI Bank and Rajasthan Bank announced a stock for stock merger.
»The boards of both banks approved the swap ratio at 1 : 4.72, meaning 25 new shares of ICICI to be issued for every 118 shares of BoR
6-3
Exchange ratio Steps for determining SWAP ratio
1. To arrive at exchange ratio both the acquirer and the target conduct a valuation of the target. 2. From the above process the acquirer determines the maximum price it is willing to pay while the target determines minimum it is willing to accept .
3. Within this range , the actual agreement
Exchange ratio price will depend on each party’s other investment opportunities and relative bargaining abilities. 4 Based on the valuation of target , the acqurier determines the per share price it is offering to pay. 5 The exchange ratio is determined by dividing the per share offer price by the market price of the acquirer’s shares
6-5
United Dynamic Communications Entertainment (Acquirer) (Target)
Net Income (PAT) 5,00,00,000
1,00,00,000
Share outstanding
20,00,000
50,00,000
Earning per share 10
5
Stock price
150
50
P/E ratio
15
10
Example »Let us assume that based on valuation of dynamic , United Communication has determined that it is willing to offer Rs 65 per share of Dynamic . This is 30% above the pre merger price of Dynamic. »In of United’s shares the Rs 65 offer is equivalent to United’s Rs 65/150 share »SWAP RATIO = .43 :1
Example »Based on the preceding data , United can calculate the total number of shares that it is willing to offer to complete a bid for 100% of Dynamic »The shares that United will issue : »((Offer price)(total outstanding shares of target))/price of acquirer or
»(Swap ratio )(total outstanding shares of target) »(Rs 65)(20,00,000)/Rs 150= 866666.67
Earning per share of surviving company »Calculating the EPS of the surviving company reveals the impact of the merger on the acquirer’s EPS »Combined earning = 6,00,00,000
»Total share outstanding = 50,00,000 +866666.67 = 58,66,666.67 »United communication ‘s impact on EPS Premerger EPS = Rs 10, post merger Rs 600,00,000/58,66,667 =10.23 This is an example of accretion in EPS (EPS accretive)
»Incase Dynamic rejects the offer and offer is revised to Rs 90 per share »Exchange ratio Rs 90/Rs 150= .60 shares »Rs 90/150 * 20,00,000 = 12,00,000 »Premerger EPS Rs 10 »Post merger EPS= 600,00,000/62.00,000= Rs 9.68
»United communication ‘s EPS declined the following the higher offer of Rs 90 . This is an example of dilution in EPS 6-10
Dilution in EPS »Dilution of EPS will occur any time the P/E ratio paid for the target exceeds the the P/E ratio of the company doing the acquiring. »The P/E ratio paid is calculated by dividing the offer price by EPS of the target company This is as follows : » P/E ratio Paid = Rs 65/Rs5= 13< 15
Rs 90/5 = 18 > 15
6-11
Practice questions
12
Question -1 Mani Ltd (Acquirer)
Particulars
Ratnam Ltd
(Target)
Profit After Tax
Rs
40,00,000
8,00,000
No. of Shares
Rs
4,00,000
2,00,000
PE Ratio
10
5
1. What is the swap ratio based on current market prices? 2. What is the EPS of Mani Ltd after the acquisition? 3. What is the expected market price per share of Mani Ltd after the acquisition, assuming its PE Ratio is adversely affected by 10% ? 4. Determine the market value of the merged Company. 5. Calculate gain / loss for the shareholders of the two independent entities, due to the merger. 13
What is the swap ratio based on current market prices? Ratnam Mani Ltd Ltd Particulars (Acquirer) (Target) 1
Profit After Tax
Rs
40,00,000 8,00,000
2
No. of Shares
Rs
4,00,000 2,00,000
3
PE Ratio
4 5 6
EPS (1 / 2 ) MPS ( 3 X 4) SWAP RATIO The shares that Mani Ltd will issue ( .2 X 2,00,000)= 40000
7
10
5
10 4 100 20 20/100= .2 :1 40,000 14
What is the EPS of Mani Ltd after the acquisition?
Profit after tax
MANI LTD RATNAM LTD
COMBINED
40,00,000
48,00,000
8,00,000
No. of Shares (4,00,000+40000)
4,40,000
EPS post merger
10.91
Expected price of Mani Ltd post merger as same PE ratio
10X 10.91
109.10
Expected price of Mani Ltd post merger as 10% less PE ratio
9X 10.91
98.19
Market Value of New Company
109.1X 4,40,000
4,80,04,000
Market value of both the companies before merger
4,40,00,000 15
Company A will acquire company B with shares of common stock Company A
Present earnings Shares outstanding Earning per share
Price per Share
Company B
2,00,00,000
50,00,000
50,00,000
20,00,000
4
2.5
64
30
PE Ratio
16 12 Company B has agreed on an offer of Rs 35/- per share in common stock of company A 1.. Compute Swap ratio 2…number of shares to be issued to company B by company A 3..Earning per share post merger of Company A 4.. What will be the earning per share post merger if the company B renegotiated the offer to Rs 50 per share
16
(a) A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.). Following information is provided: A Ltd T ltd Present earnings
18,00,000
3,60,000
6,00,000
1,80,000
3
2
Price per Share
30
14
PE Ratio
10
7
Shares outstanding Earning per share
1…number of shares to be issued to T Ltd by A Ltd 2..Earning per share post merger of A Ltd 3. What I s the expected price per share of A ltd after the acquisition 4.Determine the market value of the merged firm
17
What is the EPS of A ltd after the acquisition? A LTD
B LTD
The shares that A Ltd will issue
.5 X 1,80,000=90 000
Profit after tax
18,00,000
3,60,000
COMBINED
21,60,000
No. of Shares (6,00,000+90000)
6,90,000
EPS post merger
3.13
Expected price of Mani Ltd post merger as same PE ratio
10X 3.13
31.30
Market Value of New Company
31.3X 6,90,000
2,15,97000
Market value of both the companies before merger
2,05,20000 18
X Ltd wants to taker over Y Ltd and the financial details are as follows X Ltd
Equity Share capital Of Rs 10 each Preference Share capital Share Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
Y Ltd 1,00,000
50,000
20000 2000 38000
4000
15000
5000
173000
61000
122000
35000
51000
26000
173000
61000
24000
15000
24
27
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd 19
Share Exchange Ratio based on Net Asset Value : (1)
X Ltd
Y Ltd
Total Assets
173000
61000
Debentures
15000
5000
Preference Share Capital
20000
0
Total liabilities
35000
5000
138000
56000
10000
5000
Net Worth No of Shares
Net Worth per share Share Exchange ratio Share Exchange ratio = No of shares to be issued
13.8 11.2 Worth per share of target firm / Worth per share of acquiring firm 0.8116 5000
0.812
5000*.812
4058
20
(2) Share exchange ratio based on EPS Earning
24000
15000
No of Shares
10000
5000
2.4
3
EPS Share exchange ratio
EPS of target firm/EPS of acquiring firm
Share Exchange ratio
Rs3/Rs 2.4
No of shares
1.25
1.25 5000
6250
21
(3) shares exchange ratio based on Market price Market price of Y ltd
27
Market price of X ltd
24
SWAP RATIO and No of shares
1.125 5000 5625
Shares issued on the basis of Net worth 4058 preferred by X ltd ( Acquirer) EPS 6250 MPS 5625
22
X Ltd wants to taker over Y Ltd and the financial details are as follows X Ltd
Equity Share capital Of Rs 10 each Preference Share capital Share Profit and Loss A/c Debentures Total Fixed Assets Current Assets Total Profit After Tax and preference dividend Market Price
Y Ltd 100000
50000
20000
2000 38000
4000
15000
5000
173000
61000
122000
35000
51000
26000
173000
61000
24000
15000
24
27
What should be share exchange ratio to be offered to the shareholders of Yltd based on 1 Net Asset value 2 EPS 3 Market price.. Which should be preferred by Xltd 23
»Create a list of comparable companies, often industry peers, and obtain their market values. »Convert these market values into comparable trading multiples, such as P/E, price-tobook, enterprise-value-to-sales and EV/EBITDA multiples. »Compare the company's multiples with those of its peers to assess whether the firm is over or undervalued.
24
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