Reference no: EM132887328

Sun Pharma, with its need to grow and maintain its leadership position in the industry, is planning to acquire ABTCPL. The recent financial details of the two companies are as follows:

                                                                       Sun Pharma              ABTCPL

Profit after tax                                      Rs.2,200 lakh           Rs.40 lakh

Market price per share (face value Rs.10)         Rs.200                  Rs.24

P/E Ratio                                                        18.18                    12

Projected growth rates (p.a.)                                  9%                    5%

There are two views expressed by two leading consultants on the benefits due to synergy, one arguing that there can be no benefit from synergy while the other predicts a 3% increase in earnings after the acquisition.

Problem a. If ABTCPL's shareholders want an exchange ratio of 0.4 (i.e. 0.4 shares of Sun Pharma for 1 share of ABTCPL), would that be acceptable to the shareholders of Sun Pharma if

i. There is no synergy due to the merger?

ii. There is an increase in earnings of the merged entity by 3% due to synergy?

Problem b. If Sun Pharma accepts an exchange ratio of 0.4 and synergy benefits are not realized, will there be any dilution in EPS of Sun Pharma? If so, when will the dilution be wiped off?