X Ltd. is considering the proposal to acquire Y Ltd. and their financial information is given below : Particulars X Ltd. Y Ltd. No. of Equity Shares 1000000 600000 Market price per share (₹) 30 18 Market Capitalization (

CS Professional · Corporate Restructuring, Insolvency, Liquidation & Winding-up · PYQS · June 2022
X Ltd. is considering the proposal to acquire Y Ltd. and their financial information is given below : Particulars X Ltd. Y Ltd. No. of Equity Shares 1000000 600000 Market price per share (₹) 30 18 Market Capitalization (₹) 30000000 10800000 X Ltd. intend to pay ₹1,40,00,000 in cash for Y Ltd., if Y Ltd.'s market price reflects only its value as a separate entity, calculate the cost of merger : (ii) When merger is financed by stock. (Assume that X Ltd. agrees to exchange 5,00,000 shares in exchange of shares in Y Ltd. instead of payment of cash of ₹1,40,00,000).

Answer & Explanation:

Cost of Merger when Merger is financed by Exchange of Shares in X Ltd. to the shareholders of Y Ltd. Cost of merger = PVXY - PVY Where, PVXY = Value in X Ltd. that Y Ltd.'s shareholders get. PVY = True/intrinsic value of Y Ltd. Here X Ltd. agrees to exchange 5,00,000 shares in exchange of shares in Y Ltd. Then the cost of merger is calculated as below: = (5,00,000 * ₹30) - ₹1,08,00,000 = ₹42,00,000 PVXY = PVX + PVY = ₹3,00,00,000 + ₹1,08,00,000 = ₹4,08,00,000 Proportion that Y Ltd.'s shareholders get in X Ltd.'s Capital structure will be: = 5,00,000 / (10,00,000 + 5,00,000) = 0.3333 True Cost of Merger = PVXY - PVY = (0.3333 x ₹4,08,00,000) - ₹1,08,00,000 = ₹27,98,640 or ₹28,00,000 The cost of merger i.e., ₹42,00,000 as calculated above is much higher than the true cost of merger ₹27,98,640 or ₹28,00,000 with this proposal, the shareholders of Y Ltd. will get benefited.

Topics: Corporate Restructuring

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