Based on expected operating synergies, A Ltd. estimates that the intrinsic value of B Ltd.'s equity share would be ₹20 per share on its acquisition. Develop a range of justifiable equity share exchange ratios that can be
CS Professional · Capital Commodity and Money Market · PYQS · December 2015
Based on expected operating synergies, A Ltd. estimates that the intrinsic value of B Ltd.'s equity share would be ₹20 per share on its acquisition. Develop a range of justifiable equity share exchange ratios that can be offered by A Ltd. to B Ltd.'s shareholders. Based on your analysis in part (a) and (b) above, would you expect the negotiated terms to be closer to the upper or the lower exchange ratio limits? Give reasons.
Answer & Explanation:
Justifiable equity share exchange ratio Market price based: MPS B /MPS A = ₹15/₹40 = 0.375:1 (lower limit) Intrinsic value based: ₹20/₹40 = 0.5:1 (upper limit) Since A Ltd. has a higher EPS, ROE, P/E ratio, and higher EPS growth expectations, the negotiated terms would be expected to be closer to the lower limit, based on the existing share prices.
Topics: Mergers and Acquisitions
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