XYZ Company Ltd. (XYZ) is acquiring PQR Company Ltd. (PQR). XYZ will pay its 0.5 share to the shareholders of PQR for each share held by them in PQR. The data for the two companies are as given below: XYZ PQR Profit afte

CS Professional · Corporate Restructuring, Valuation and Insolvency · PYQS · December 2020
XYZ Company Ltd. (XYZ) is acquiring PQR Company Ltd. (PQR). XYZ will pay its 0.5 share to the shareholders of PQR for each share held by them in PQR. The data for the two companies are as given below: XYZ PQR Profit after tax (in lakh) 150 30 Number of shares (in lakh) 25 8 Earnings per share (₹) 6.00 3.75 Market price per share (₹) 78.00 33.75 Price-earnings ratio 13 9 Calculate the earnings-per share of the Resultant /amalgamated company. If the price earnings ratio of XYZ falls to 12 after the merger, what would have been the premium received by the shareholders of PQR. How far is the visible (financial) gain or loss to the shareholders of XYZ Ltd. on account of the merger? Note: (1) Assume that same financial results continue for the next year. (2) Present calculations upto 2 decimals ignoring the rest.

Answer & Explanation:

Combined profit after tax = 150 + 30 = ₹180 Lakh Combined shares = 25 + 0.5(8) = 29 lakh EPS = 180/29 = ₹6.21 Market price after merger = Revised P/E * EPS = 12 * 6.21 = ₹74.52 Premium to PQR Shareholder = {0.5(74.52) - 33.75}/33.75 = (37.26 - 33.75)/33.75 = 0.104 or 10.4% The merger is not beneficial to XYZ's shareholders because their price falls from ₹78 to ₹74.52 there is a loss of 4.46%.

Topics: Valuation

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