Master of Business Administration- MBA Semester 3

MF0011 – Merger & Acquisition

Assignment Set- 2 (60 Marks)

Q.1 Explain the differences between a flip- in and flip over poison pill?

Ans. Flip-OverA provision in a poison pill that gives shareholders the right to buy the company’s shares (or the shares of the surviving company after a merger) at half price. Unlike a Flip-in, a flip-over right does not become effective simply because an interested shareholder buys some stock. Usually it becomes effective when (i) there is an interested shareholder and (ii) the company engages in certain transactions with the interested shareholder or an affiliate, such as a merger or a sale of all or a large part of its assets. Historically, the flip-over poison pill was devised several years before the more powerful flip-in. At that time the essential discrimination against the interested shareholder that the flip-in entails was widely considered illegal. Now the two are generally combined, although under most circumstancesthe flip-in provision of the pill dominates any potential bidder’s attention.

Flip-in poison pill planShareholders are issued rights to acquire stock in the target at a significant discount which is usually 50%.

Flip-inThe most important characteristic of the most effective rights plan (position pill) in use today. It gives shareholders the right to buy the company’s shares at half price when someone becomes an ‘interested shareholder’, that is, crosses some stock ownership threshold such as 15% or 20%. The interested shareholder’s rights are void. Other shareholders can (typically) use each of their rights to buy a number of shares equal to two times the exercise price (set in advance), divided by the current market price of the target company’s stock. Usually, from the standpoint of a bidder, the flip-in right is a complete show stopper unless the bidder can convince a court that it should intervene. In the text we have tried to describe when courts intervene against poison pills under Delaware law.

Flip-over Poison Pill PlanThe most popular type of poison pill anti-takeover defense. Shareholders of the target firm are issued rights to purchase common stock at an exercise price high above the current market price. If a merger occurs, the rights flip over and allow shareholders to purchase the acquiring firm’s common stock at a substantial discount.

Q 6. Compute the net wealth and wealth tax liability of Golden Jewellers ltd. as on 31-3-11. The company is engaged in the jewellery business export and domestic sales

Rs.Factory buildingsBank BalanceUnaccounted cash balanceSilver wareGold ornamentsMotor cars

520000.00 140000.00 25500.001200000.003500000.00 150000.00

The company has taken a loan of Rs. 600000.00 for factory premise

Ans Computation of Wealth Tax of Golden Jewellers ltd as on 31.3.11

Unaccounted Cash Balance Rs.25500

Motor cars Rs.150000

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Total Rs.1525500

Less: Rs.1500000

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Net Wealth Taxable Rs.25500

Wealth Tax (1%) Rs.255 (1% of Rs.25500)

Note: Silver ware & Gold Ornament is not considered as these are stock in trade.

Only unaccounted cash balance consider for the wealth tax in case of the company.

Q.3 Fill in the blanks below, and discuss your results. [10Marks]

Comparable Company Ratio(Company W is compared with companies TA, TB, TC)

Ratio Company TA Company TB Company TC AverageEnterprise

Market value / revenues

2 2.5 1

Enterprise Market value /

EBITDA

20 10 5

Enterprise Market value / Free cash flow

30 20 25

Application of valuation ratios to company W

Actual recent data for company W

Average Ratios Indicated Enterprise Market Value

Revenues = $200EBITDA = $10Free cash flow = $5

Average =

Ans.

Comparable Company Ratio(Company W is compared with companies TA, TB, TC)

Ratio Company TA Company TB Company TC AverageEnterprise

Market value / revenues

2 2.5 1 1.833

Enterprise Market value /

EBITDA

20 10 5 11.67

Enterprise Market value / Free cash flow

30 20 25 25

Actual recent data for company W

Average Ratios Indicated Enterprise Market Value

Revenues = $200EBITDA = $10Free cash flow = $5

1.83 11.67 25

$367$117$125

Average = $609