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How purchase consideration is done in the merger model?
Let us assume company 1 is taking over company 2. In this, company 1 is acquiring company and company 2 is Target Company.
|Total number of shares||800000||550000|
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.
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
Only debentures issued to common shareholders, form of purchase considerations
Debentures for existing bondholders of company 2 are separately considered.
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