Assignment_1_Group_9

Assignment 1
Submitted to: Prof. Jijo Lukose P.J.
Date of submission: 16-06-2025
Course: Valuations, Mergers & Acquisitions
Group members
Name Roll No.

KONARK GOYAL EPGP/16/147

KETAN GUPTA EPGP/16/246

MOHIT VERMA EPGP/16/254

 SANDEEP YADAV EPGP/16/281

VIKAS SINGH EPGP/16/302

AKASH DAYAL EPGP/16/418

SHANMUKHA ADITYA VADLAMANI EPGP/16/176

Assignment Q2: Stock Prices and Goodwill

Including goodwill in the calculations of the ratio of Total Assets to Total Liabilities can
distort the economic reality of the consequences of acquisitions.
Scenario 1
The shares of Amalgamator (A) and Consolidator(C) are both trading at multiples of 2.5
times book value per share. Shareholders’ equity is $200 million at A and $60 million at C.
Amalgamator uses stock held in its treasury to acquire Consolidator for $262.5 million. The
purchase price represents a premium of 75 percent above the prevailing market price. Prior
to the acquisition, A’s ratio of total assets to total liabilities is 2 times, while the comparable
figure for C is 2 times. The total-assets-to-total-liabilities ratio after the deal Is 2.78 times. By
paying a premium to C’s tangible asset value, A creates $202.5 million of goodwill.
Scenario 2
As the scene opens, an explosive stock market rally has driven up both companies’ shares to
4.5 times book value. The ratio of total assets to total liabilities, however, remains at 2
times for A and 2 times for C. As in scenario 1, Amalgamator pays a premium of 75 percent
above the prevailing market price to acquire Consolidator. The premium is calculated on a
higher market capitalization, however. Consequently, the purchase price rises from $ 262.5
million to $ 472.5 million. Instead of creating $202.5 million of goodwill, the acquisition
gives rise to a $412.5 million intangible asset. Somehow, putting together a company
boasting a 2 times ratio with another sporting a 2 times ratio has produced an entity with a
ratio of 3.6 times.
Now, let us exclude goodwill in calculating the ratio of assets to liabilities. Amalgamator’s
ratio of tangible assets to total liabilities following its acquisition of Consolidator is 2 times in
both Case 1 and Case 2. This is the outcome that best reflects economic reality.
Assignment Q3: Merger Arbitrage
Question 3.1 - Merger Premium
Merger premium. Read the press release “Volkswagen ‐announces ‐a ‐cash ‐offer.” What
was the price before the announcement for A and B shares and what is the offered price.
Estimate the “merger premium,” and compare this with “deal spread.”
From the press release, the closing prices on 21 February 2014 (last trading day before the
announcement) were:
Share price before the announcement

A Shares SEK 144.50

B Shares SEK 147.50

Offer Price: Volkswagen’s offer is SEK 200 per share for both A and B shares.
Merger Premium Calculation: percentage increase from the pre-announcement price to the
offer price.
Premium = ((Offer price - Pre-Announcement Price)/Pre-Announcement Price) x 100
For Shares A:
Premium = ((200 - 144.50)/144.50) x 100 = 38.4%
For Shares B:
Premium = ((200 - 147.50)/147.50) x 100 = 35.6%
Merger Premium

A Shares 38.4%

B Shares 35.6%
From Question 3, we are given the closing price on February 24, 2014 (the first trading day
after the offer was announced) as SEK 194.5 per share.
Deal Spread:
 Spread = (Offered Price - Post-announcement Market Price) / Offered Price
 Spread = (SEK 200 - SEK 194.5) / SEK 200 = SEK 5.5 / SEK 200 = 0.0275
Deal Spread: 2.75%
Scania’s post-deal price was about 97–98% of the offer value, leaving a ~2.8% “gap”
As shown above, before the announcement Scania’s stocks were around 144–148 SEK,
and VW’s offer of 200 SEK represents a huge increase. That merger premium (≈36%)
signifies how much extra value VW was willing to pay. In contrast, after the announcement,
the stocks climbed into the 190s SEK – very close to 200, leaving only a small deal spread of
about 2–3%.
Interpretation: The large merger premium indicates VW’s bid was at a significant
premium to Scania’s prior market value (rewarding shareholders handsomely). The small
deal spread indicates that the market believed this generous offer was likely to succeed.
Question 3.2 - Merger Event Risk
Part (a):
Subjective Probability of Each Condition (As of Feb 2014)
Based on the press release titled Volkswagen announces a cash offer to the shareholders of Scania
AB (Feb 21, 2014), the completion of the offer was subject to the following six conditions:
Condition Description Probability Reasoning
(Subjective,
Feb 2014)

1 Volkswagen becomes 60% VW already owned 62.6% of

owner of more than 90% capital and 89.2% of voting rights.
of shares in Scania. Getting to 90% was likely, but not
guaranteed, depending on
minority shareholders accepting
the offer.

2 Receipt of all necessary 95% Given VW already had a large

regulatory, governmental, holding, and both firms operated
or similar clearances in different geographic and market
(including competition segments, regulatory approval was
approval). highly likely.
 3 No other party is 90% VW already had de facto control; a
announcing a competing counter bid was unlikely due to
offer. high barriers and ownership
structure.

4 No event occurring that 85% Scania was financially stable;

has a material adverse unless a macroeconomic shock
effect on Scania's financial occurred, this was unlikely to block
position or operations. the deal.

5 Scania not taking any 90% Scania had no incentive to

action outside its normal sabotage the deal; this was
course of business (e.g. standard in M&A deals to maintain
large divestments, value.
acquisitions).

6 The offer not being 75% Tied to whether VW reached 90%

revoked due to other — a more conditional clause, with
conditions not being moderate risk.
fulfilled.
Overall Deal Completion Probability (Subjective): 70–75%
 The biggest uncertainty was reaching 90% ownership. While VW had strong
control, the offer needed minority shareholders’ support, particularly
institutional investors, some of whom initially resisted. The other conditions
posed low-to-moderate risk.
Part (b):
What Research Would Be Most Valuable?
Event-Driven event‐driven investment manager perspective
 Shareholder base analysis: Identify who holds the remaining Scania shares.
Focus on institutional investors (e.g. mutual funds, pension funds) and gauge
their voting behavior or historical stance on takeovers.
 Track record of minority resistance: Research past Swedish takeovers where
90% squeeze-out was required. Analyze if minority blocks had derailed such
deals.
 Legal/regulatory insight: Investigate specific thresholds and squeeze-out
rules in Sweden, as well as any precedent for regulatory challenges.
 Expected timeline & catalysts: Monitor any deadlines or pressure points that
could shift investor sentiment (e.g. new quarterly results, proxy voting
deadlines).
 Market sentiment & trading data: Watch the spread between offer price and
trading price to assess market-implied probability. Sudden narrowing or
widening could indicate new information.
Question 3.3 - Market-implied market risk
Key Assumptions
1. Failure price = Pre-announcement price (SEK 147.50)
 Why?
  If the deal fails, Scania’s stock would likely revert to its pre-
offer price (no competing bid mentioned; Press release 4
states the price is "final").
 The press releases indicate no material changes in Scania’s
operations if the deal fails (press release 3).
2. Time value of money is negligible
 Why?
 The deal was settled within 3 months (acceptance period
ended April 25, settlement by May 27; press release 4&5).
 With low 2014 interest rates (~0.3% annualized), discounting
has minimal impact.
3. No dividends or other cash flows
 Why?
 Press releases mention no dividends during the offer period
(press release 1: consideration adjusted for dividends, but
none announced).
4. SEK 194.5 refers to B-shares
 Why?
 B-shares are more liquid and used for premium calculations in
press release 1.
 A-shares traded at a discount pre-announcement (SEK 144.50),
making SEK 194.5 inconsistent for A-shares.
Implied Risk-Neutral Probability
The market price reflects the expected value of the deal:
Market Price = (Probability of Success × Offer Price) + (Probability of Failure × Failure Price)
Let p = probability of success.
194.5 = (p x 200) + ((1 - p) x 147.5)
Solving for p:
p = 47/52.5 = 0.8952 = 89.5%
Conclusion
 89.5% probability implies high market confidence in deal completion.
 Why?
 VW already controlled 89.2% of voting rights (VW1.pdf), making >90%
acceptance likely.
 No antitrust red flags (VW/Scania businesses are complementary).
 The deal spread was narrow:
Deal Spread = 200 − 194.5 = SEK 5.5 (2.75%)