Merger & Acquisition Guidelines

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Corporate Bridge – M&A Project – Assignment 4 Guidelines

DR. REDDY’S ACQUISTION OF CIPLA

Assumption–CIPLA Acquisition Price - Current Market Price (CMP) + 15% premium on CMP

OBJECTIVE OF THE MERGER?

The objective of the Merger Modeling is to propose whether DRL should go ahead and merge with CIPLA

What you need to evaluate – Merger Consequence Analysis

1. All Stock Deal – All CIPLA Shareholder’s are issued shares in the merged entity

2. All Cash Deal – All CIPLA Shares are cancelled and they receive cash at the above Acquisition Price

3. Cash & Stock Deal – Take a scenario of 50% cash and 50% Stock Deal

Bottomline – you need to suggest how the merger should take place as per above!

PRE-REQUISITES

You should have completed the financial model of CIPLA

You should have access to the financial model of Dr. Reddy’s that we had uploaded/sent

Acquisition of Duane Reade by CVS (with solutions) from the Training Library.

o In Duane Reade by CVS (with solution) worksheet, there is mistake in linkage, cell I32 formula

should be =C27*I13/100

INTEGRATING ALL THE EXCEL FILES/WORKSHEETS

Please refer to the attached excel sheet CB_MergerAcquisition.xls. This excel file contains the

following worksheets

o Assumption Worksheet

o Pro-forma BS Worksheet

o Pro-forma IS Worksheet

Before you start, please insert the above worksheets in Dr. Reddy’s Model.

Also, insert all the worksheets that you have prepared for CIPLA in Dr. Reddy’s Model.

The idea is to make ONE Excel Sheet that contains the following –

CIPLA Model

DRL Model

CB_MergerAcquisition Tabs for Analysis

Tip –RIGHT CLICK on the worksheet and MOVE/COPY to shift all your worksheets from One Excel file to

another Excel File. Please do NOT checkmark CREATECOPY.



PROJECT GUIDELINES

Worksheet 1 - Completing the Assumption

Step 1 – Complete the Deal Information

Acquisition date is 3/31/2012

Current Market Price should be taken from NSE/BSE

Acquirer Stock Price is Dr. Reddy’s Current Market Price

Step 2 – Calculate Offer Value

With the help of above Target Cipla Stock Price, the total offer price can be calculated

Please note that Basic shares outstanding and diluted shares outstanding will be same if the company doesn’t have

in-the-money options/convertibles

Step 3 – Input the Transaction Assumptions

The transaction assumptions include 1) all stock deal 2) all cash deal, and 3) 50% Cash &50% stock deal. In this

table you should be able to do this dynamically by changing the percentage.

For all stock deal, the cells should be 100% and percentage cash will be 0%

Exchange ratio implies the swap ratio (for 1 CIPLA shares, how many Dr. Reddy’s shares are issued).

Transaction Expense can be assumed to be the Investment Banking commission fees. (please take this as

0.5% of the total offer value)

Deal Information

Target: Cipla

Acquiror: Dr. Reddy

Acquistion Date

Acquiror Fiscal Year End Prior To Acquistion

Cipla Current Market Price

Offer Premium 15%

Target Cipla Stock Price (@15% premium)

Aquirer Stock Price

Offer Value Calculations

Offer Price per Share

Target Basic Shares Outstanding

Target Diluted Shares Outstanding

Offer Value (INR mn)

Transaction Assumptions

Percentage Stock

Percentage Cash

Exchange Ratio

Acquiror's % Stake In Target 100%

Acquiror Shares Issued In Transaction (MM's)

Transaction Expenses



Step 4 – Calculate Goodwill

Offer value is taken from Step 2

Book value of the Target is the Net Worth of Cipla from its Balance Sheet

Goodwill created is the difference between Offer Value and Book Value of the Target

Total Transaction Goodwill is transferred to the Pro-forma Balance Sheet

Step 5 – Calculate the Sources & Uses of Funds

Please see the Acquisition of Duane Reade by CVS from the Training Library

Goodwill Calculation

Offer Value (Purchase Price)

Less: Book value of Target

Goodwill Created (Ex. Existing Goodwill)

Plus: Existing Goodwill on Target BS

Total Transaction Goodwill

Sources & Uses of Funds

Sources

Excess Cash

Acquistion Debt Financing

Target Debt Assumed

Stock Issued

Total

Uses

Transaction Expenses

Purchase of Equity

Target Debt Assumed

Total



Worksheet 2 - Completing the Pro-forma Balance Sheet

Prepare the pro-forma Balance Sheet of DRL-CIPLA as of 31st March, 2012.

Please note you are NOT required to prepare the pro-forma balance sheet of other years ( 2013, 2014, 2015,

2016 etc)

Adjustment for Shareholders Equity should be dynamic in such a way that if we change the % stock from

100% to say 50% in the Assumption Worksheet, the “financing adjustment” automatically incorporates the

same.

Adjustment for Debt should be dynamic in such a way that if we change the % stock from 100% to say

50% in the Assumption Worksheet, the “financing adjustment” automatically incorporates the same.

Please refer to the Acquisition of Duane Reade by CVS from the Training Library for further linkage

explanation

Acquisition of Cipla by Dr. Reddy

Pro Forma Balance Sheet($ in millions, except per share data)

Transaction Value Per Share Dr. Reddy Cipla Adjustments Pro Forma

3/31/2012 3/31/2012 Write-Up Financing 3/31/2012

Assets

Current Assets

Cash and Equivalents

Accounts Receivable

Inventory

Deferred Income Taxes

Loans & Advances

Other Current Assets

Total Current Assets

Net PP&E

Goodwill

Intangibles

Investments/Restricted Cash

Unearned Compensation

Deferred Financing Fees

Other Assets

Total Assets

Liabilities and Stockholders' Equity

Current Liabilities

Accounts Payable

Accrued Expenses

Income Taxes Payable

Deferred Revenue

Other Current Liabilities

Current Portion of Long-Term Debt

Total Current Liabilities

Revolver

Non-Convertible Debt

Convertible Debt

Deferred Income Taxes

Other Long-Term Liabilities

Total Liabilities

Preferred Stock, par value

Common Stock, par value -

Additional Paid-in Capital (APIC)

Treasury Stock

Accum. & Other Comp. Income (Loss)

Retained Earnings

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

Check - - -



Worksheet 3 - Calculate the Pro-forma Income Statement

Step 1 - Prepare the Pro-forma Income Statement of DRL-CIPLA for 2012, 2013, 2014, 2015 & 2016

Please note that you have been provided with the Income Statement forecasts for Dr. Reddy’s

In addition, you have already forecasted the Income Statement forecasts of CIPLA

Please ADD all line items of Dr. Reddy’s and CIPLA to form the Merged Income Statement.

Interest expense needs recalculated and should be linked to the additional debt (from the Pro-forma BS).

Please note that Interest Expense should be dynamic such that in case of 100% stock, there is no

incremental interest expense

Also note that you should NOT consider any synergies associated with the Merged Entity. Synergies can

come by way of decreased competition in the common product, cost synergies by way of usage of common

manufacturing facility etc.

We consider the Synergy analysis in the next step.

Acquisition of Cipla by Dr. Reddy

Pro Forma Income Statement

FY Ended March 31st, FY Ended March 31st,

2008A 2009A 2010A 2011A 2012P 2013P 2014P 2015P

Total Revenue

COGS

Gross Profit

SG&A

EBITDA

Depreciation & Amortization

Total D&A

EBIT

Interest (Income) / Expense

Equity (Income)Minority InterestOther (Income) / ExpenseSynergy

Income Before Taxes

Provision for TaxTax Rate

PAT (DRL-CIPLA)Diluted Shares Out



Step 2 - Calculate the EPS Accretion / Dilution & Breakeven Synergies required for each year (2013, 2014,

2015, 2016 & 2017)

Step 3 – Sensitivity Analysis of EPS Accretion of 2012 with respect to Pre-tax synergies and Cash (%)

Use DATA TABLEs to calculate EPS Accretion.

Column Input – Pretax Synergies should be linked from the synergy line item of PL of 2012. Please note

that we have assumed this line item to be 0, however, the formula for EBT should include this cell.

Row Input – Cash % should be linked from the synergy line item of Assumption Sheet.

Study the sensitivity analysis and recommend the best possible action for the Merger.

For example best possible action that could be suggested may be 40% cash and 60% stock.

Step 4 – Sensitivity Analysis of EPS Accretion of 2013 with respect to Pre-tax synergies and Cash (%)

Use DATA TABLEs to calculate EPS Accretion.

Column Input – Pretax Synergies should be linked from the synergy line item of PL of 2013. Please note

that we have assumed this line item to be 0, however, the formula for EBT should include this cell.

Row Input – Cash % should be linked from the synergy line item of Assumption Sheet.

Study the sensitivity analysis and recommend the best possible action for the Merger.

For example best possible action that could be suggested may be 40% cash and 60% stock.

FY Ended March 31st, FY Ended March 31st,

2008A 2009A 2010A 2011A 2012P 2013P 2014P 2015P 2016P

PAT (DRL-CIPLA)

Diluted Shares Out

Diluted EPS (DRL-CIPLA)

Diluted EPS (DRL alone)

Accretion / (Dilution)

% Accretion / (Dilution)

Incremental Pre-Tax Synergies to Breakeven

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%- 500

1,000 1,500 2,000 2,500 3,000

Cash %

Pre

-tax

syn

ergi

es

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%- 500

1,000 1,500 2,000 2,500 3,000

Cash %

Pre

-tax

syn

ergi

es

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Merger & Acquisition Guidelines