# 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.

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