Mergers, Acquisitions & Corporate Restructuring

M&A is AFM's integrative chapter — it stitches valuation, capital structure,

synergy quantification, share-swap mechanics, and SEBI takeover regulation

into a single applied case. Questions are typically case-style with multiple

sub-parts adding to 8–14 marks.

1. Types of M&A

2. Motives — synergy decomposition

Synergy = Value of combined firm − Sum of standalone values.

Synergy = V(AB) − [V(A) + V(B)]

Four flavours:

1. Operating synergy (cost) — shared SG&A, plant consolidation, supply

chain integration.

1. Operating synergy (revenue) — cross-sell, geographic expansion,

bundling.

1. Financial synergy — lower WACC from combined credit profile, tax

benefits from offset losses, more efficient capital allocation.

1. Tax synergy — Section 72A IT Act allows brought-forward losses of

an amalgamating company to be carried forward by the amalgamated

company (industrial conditions apply).

3. Valuation in M&A

Standard approaches, applied side-by-side:

The acquirer's offer band: **floor = standalone value of target; ceiling =

standalone + PV of expected synergies.** A topper answer always shows both.

4. Share-swap ratio

When consideration is paid in stock, the swap ratio is the number of

acquirer shares offered per target share.

Swap ratio (EPS-based) = EPS of target / EPS of acquirer

Swap ratio (MPS-based) = MPS of target / MPS of acquirer

ICAI almost always asks for both and the comparison.

5. Post-merger EPS / MPS

Post-merger EPS = (NI_A + NI_B + Synergy_PAT) / (Shares_A + ER × Shares_B)

where ER = exchange ratio.

Post-merger MPS = Post-merger EPS × P/E_AB

EPS accretive = post-merger EPS > acquirer's pre-merger EPS.

EPS dilutive = post-merger EPS < acquirer's pre-merger EPS.

A high-P/E acquirer buying a low-P/E target with stock is typically EPS

accretive even with zero real synergy — this is the bootstrapping trap

that examiners flag. Topper answers state explicitly: "accounting accretion

is not value creation."

6. Maximum exchange ratio acceptable to acquirer

Acquirer's shareholders are not made worse off iff the post-merger MPS ≥

acquirer's pre-merger MPS.

ER_max × Shares_B = (V(AB) − Shares_A × MPS_A_pre) / MPS_A_pre

Algebraically: acquirer can pay up to the full PV of synergies in stock

before shareholders lose.

7. Defence mechanisms (theory questions)

8. Indian regulatory overlay

• •SEBI Takeover Code (SAST Regulations 2011) — triggers an open offer

if acquirer's stake crosses 25%. Open offer must be for at least 26% of

remaining shares.

• •Companies Act 2013 — Sections 230–232 — NCLT scheme of arrangement

for mergers, amalgamations, demergers. Approval requires creditors (75%

by value) and shareholders (75% by value).

• •Section 72A IT Act — carry-forward of losses on amalgamation.
• •Competition Act 2002 — CCI approval required if combined assets

exceed threshold limits.

9. ICAI exam patterns

M&A appears in most attempts as one full 8-mark question.

10. The 60+ marks topper convention

• •Lay out the deal in a 3-column table — Acquirer / Target / Combined —

with EPS, P/E, MPS, NI, Shares for each.

• •Compute swap ratios separately by EPS and MPS — show both, then

recommend.

• •Identify the bootstrapping trap explicitly when relevant — "EPS

accretion of X% is purely a P/E differential, not value creation."

• •For acquirer-acceptability questions, state the inequality —

Post-merger MPS ≥ Pre-merger MPS — and solve for ER.

• •Cite the SAST trigger and Companies Act section — earns the

authority mark.

• •Box the swap ratio and the verdict.