Mergers
Olivier LEVYNE
Principle
• Contribution of assets and liabilities of one of the merging
entities to the other entity (absorbing company) based on
their net book value or on their economic value.
• The first company is then broken up
• The merger parity is based:
– Either on book value of the shares (ie: equity book value /
number of shares)
– Or on the economic (or market) value of the shares (ie: NAV per
share or listed price)
• The balance sheet equilibrium then relies on the premium
= Value of assets contribution – capital increase
Base case
• Assumptions
Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger
Accounting balance sheet Accounting balance sheet
Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000
WCR 300 000 (1000x100€) WCR 900 000 (2000x100€)
Reserves 400 000 Reserves 800 000
Net debt 500 000 Net debt 100 000
_______ _______ _______ _______
Total 1 000 000 1 000 000 Total 1 100 000 1 100 000
Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400
Company 1 (to be taken over)
Economic balance sheet
Fixed assets 1 200 000 Capital 100 000
WCR 300 000 (1000x100€)
Reserves 400 000
Latent capital gain 500 000
Net debt 500 000
_______ _______
Total 1 500 000 1 500 000
Base case
• Parity and contributions based on book values
Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the equity BV
Accounting balance sheet Accounting balance sheet Company 1 2
Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (BV) 1 000 000 1 100 000
WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)
Reserves 400 000 Reserves 800 000
Net debt 500 000 Net debt 100 000 Equity value 500 000 1 000 000
_______ _______ _______ _______ Nb of shares 1 000 2 000
Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 500 500
Parity 1 for 1
Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 1 000
Nominal value 100
Company 1 (to be taken over) Capital increase 100 000
Economic balance sheet Company 2 (absorbing entity) - post merger
Fixed assets 1 200 000 Capital 100 000 Accounting balance sheet (parity based on book values) Contribution (NBV) 500 000
WCR 300 000 (1000x100€) Fixed assets 900 000 Capital 300 000 (Capital increase) (100 000)
Reserves 400 000 WCR 1 200 000 Premium 400 000 Premium 400 000
Latent capital gain 500 000 Reserves 800 000
Net debt 500 000 Net debt 600 000
_______ _______ _______ _______
Total 1 500 000 1 500 000 Total 2 100 000 2 100 000
Base case
• Parity and contributions based on economic
values
Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity
Accounting balance sheet Accounting balance sheet Company 1 2
Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (eco) 1 500 000 4 100 000
WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)
Reserves 400 000 Reserves 800 000
Net debt 500 000 Net debt 100 000 Equity value 1 000 000 4 000 000
_______ _______ _______ _______ Nb of shares 1 000 2 000
Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 1 000 2 000
Parity 2 for 1
Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 500
Nominal value 100
Company 1 (to be taken over) Company 2 (absorbing entity) - post merger Capital increase 50 000
Economic balance sheet Accounting balance sheet (parity based on economic values)
Fixed assets 1 200 000 Capital 100 000 Fixed assets 1 400 000 Capital 250 000 Contribution (NBV) 1 000 000
WCR 300 000 (1000x100€) WCR 1 200 000 Premium 950 000 (Capital increase) (50 000)
Reserves 400 000 Reserves 800 000 Premium 950 000
Latent capital gain 500 000 Net debt 600 000
Net debt 500 000 _______ _______
_______ _______ Total 2 600 000 2 600 000
Total 1 500 000 1 500 000
Base case
• Contribution based on book value and parity
based on the economic value per share
Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity
Accounting balance sheet Accounting balance sheet Company 1 2
Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (eco) 1 500 000 4 100 000
WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)
Reserves 400 000 Reserves 800 000
Net debt 500 000 Net debt 100 000 Equity value 1 000 000 4 000 000
_______ _______ _______ _______ Nb of shares 1 000 2 000
Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 1 000 2 000
Parity 2 for 1
Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 500
Nominal value 100
Company 1 (to be taken over) Company 2 (absorbing entity) - post merger Capital increase 50 000
Economic balance sheet Accounting balance sheet (parity based on economic values)
Fixed assets 1 200 000 Capital 100 000 Fixed assets 900 000 Capital 250 000 Contribution (NBV) 500 000
WCR 300 000 (1000x100€) WCR 1 200 000 Premium 450 000 (Capital increase) (50 000)
Reserves 400 000 Reserves 800 000 Premium 450 000
Latent capital gain 500 000 Net debt 600 000
Net debt 500 000 _______ _______
_______ _______ Total 2 100 000 2 100 000
Total 1 500 000 1 500 000
Base case
• Contribution based on book value and parity
based on the listed share price
Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity
Accounting balance sheet Accounting balance sheet Company 1 2
Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value / share 1 200 400
WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) Parity 0,33 for 1
Reserves 400 000 Reserves 800 000 Nb of shares to issue 3 000
Net debt 500 000 Net debt 100 000 Nominal value 100
_______ _______ _______ _______ Capital increase 300 000
Total 1 000 000 1 000 000 Total 1 100 000 1 100 000
Contribution (NBV) 500 000
Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 (Capital increase) (300 000)
Premium 200 000
Company 1 (to be taken over) Company 2 (absorbing entity) - post merger
Economic balance sheet Accounting balance sheet (parity based on listed prices)
Fixed assets 1 200 000 Capital 100 000 Fixed assets 900 000 Capital 500 000
WCR 300 000 (1000x100€) WCR 1 200 000 Premium 200 000
Reserves 400 000 Reserves 800 000
Latent capital gain 500 000 Net debt 600 000
Net debt 500 000 _______ _______
_______ _______ Total 2 100 000 2 100 000
Total 1 500 000 1 500 000