How purchase consideration is done in the merger model?

FinanceFinance ManagementBanking & Finance

Let us assume company 1 is taking over company 2. In this, company 1 is acquiring company and company 2 is Target Company.


AB
Total number of shares800000550000
Market price/share$6$3.25
10% Debentures
$250000

The board also decides the following −

  • Issue 1 share of company 1 for every 10 shares held.
  • Issue a 12% debentures for every 4 shares held.
  • Balance is paid in cash.
  • Pay existing debenture holders at par by issuing 20% debentures in company 1.
  • Debenture (nominal value) = $2.

Solution

The solution is as follows −

  • Market value of company B is calculated by multiplying total number of shares of company B with market price of company B.
    Market value of company 2 = $550000 * 3.25 => $1787500
  • Equity share held by company B is calculated by dividing total number of shares held by company with 10 (because board decided to issue 1 share for every 10 share) and multiplying with market price of company A.
    Equity share held = 550000 / 10 * $6 => $330000
  • Now the balance is calculated by subtracting market value of company B to equity share held.
    Balance = $1787500 − $ 330000 => $1457500
  • Now debentures issue is calculated by dividing total number of shares of company with 4 (because board decided to issue 12% debentures for every 4 shares held) and multiplying with debenture nominal value.
    Debenture issued = 550000/4 * $2 => $275000
  • Finally, balance is calculated by subtracting market value of company B to equity share held to debenture issued.
    Balance = market value of company 2 − equity shares − debentures issued
    = $1787500 − $330000 − $275000 => $1787500 − $ 605000
    = $1182500

Only debentures issued to common shareholders, form of purchase considerations

Debentures for existing bondholders of company 2 are separately considered.

raja
Published on 19-Jul-2021 09:40:17
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