PRICE EARNING RATIO VALUATION IN TERMS OF

MERGERS AND ACQUISITIONS

Presented By:
Anurag Ashutosh Athar Binish Deepak Faisal Faris

Mergers and Acquisitions

Definition of Merger Combining of two business entities under common ownership. Or Two firms coalesce and share resources in order to realise a common goal. But One party almost always dominates so

Mergers and Acquisitions

Acquisition One firm buys the assets or shares of another
Takeover implies the acquiring firm is larger than the target Reverse takeover if the target is larger than the acquirer

Mergers and Acquisitions

So why? To Maximise Shareholders Wealth Through

- differences in stock market valuations - dissemination of skills - synergies (2+2= 5)

WHAT IS A P/E RATIO AND WHY SHOULD COMPANY CARE?

What is the P/E Ratio?

The P/E ratio is the price per share of stock divided by the earnings per share of stock

P/E Ratios
The P/E ratio is the amount of money someone is willing to pay to get 1 of earnings It could be considered a popularity contest
In general - the faster a company is growing,

the higher the P/E it will have

P/E Ratios
What is a good P/E or a bad P/E
It depends!!!!
Look at past history of P/E ratios

Look at other companies in same industry

Look at average P/E for Nifty Look at the prospects for the company

P/E Ratios
In general, the faster a company grows - the higher the P/E ratio
As the growth of a company slows over time -

the P/E ratios will usually come down

P/E Ratios
Different types of industries tend to have different P/Es - even if the growth rates are similar Part 3 of the Stock Selection Guide helps us determine the normal range of high and low P/E

P/E Ratios
Dont buy a stock just because the P/E ratio is low Do more research - try to discover why it is

low There may be bad news and it deserves to be low The future growth prospects are the real driving force

P/E Ratios
There are 6 basic ways a company can increase earnings

Reduce costs Raise prices Open more stores/expand Sell more in existing markets Fix or sell losing operations Lower taxes paid

PE Ratio

Helps in

Valuation

EXERCISE
COMPANY A NO. OF SHARES 2 LACS MARKET VALUE PER SHARE RS.25 EPS RS.3.125 COMPANY B NO. OF SHARES 1 LAC MARKET VALUE RS.18.75 EPS RS.2.5

CONCLUSIONS
EXCHANGE AT EPS NO EFFECT ON EPS AFTER MERGER
EXCHANGE MORE THAN EPS RATIO

COMPANY WITH LOWER EPS GAINS IF LESS THAN EPS RATIO COMPANY WITH HIGHER EPS BEFORE MERGER GAINS

PRICE EARNING RATIO APPROACH

COMPUTATION :

P/E RATIO = MP/EPS EPS = EAT/NO. OF EQUITY SHARES MARKET PRICE = P/E (NO. OF TIMES) * EPS

EXAMPLE
PRE MERGER SITUATION EAT NO. OF SHARES EPS FIRM A FIRM B

6,25,000 2,00,000 3.125

2,50,000 1,00,000 2.5

P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)

8 25 50,00,000

7.5 18.75 18,75,000

POST MERGER

SITUATION 1 (BASED ON CURRENT MARKET PRICE 2.5:3.125=.8 6.25+2.5=8.75 2.8 lakhs

SITUATION 2

EXCHANE RATIO/ SWAP RATIO (ASSUMING) EAT(COMBINED FIRM) NO. OF SHARES

1:1 8,75,000 2,00,000+1,00,000=3,00,0 00 8,75,000/3,00,000=2.91/ 7.5

EPS P/E RATIO (ASSUMED TO BE THE SAME) MPS

8.75/2.8=3.125 8

3.125*8=25

21.825

TOTAL MARKET VALUE

70,00,000

65,47,500

CONCLUSION
FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES

MARKET VALUE AFTER MERGER

THANK YOU