History of merging and merged companies and scheme of merger
History of ITC Bhadrachalam paper Boards Ltd. (i.e., Merging Company)
ITC Bhadrachalam paper Boards Ltd. (hereafter referred to as IBPL) was incorporated ass Bhadrachalam Paperboards Ltd, on 17th July 1975 by ITC Ltd, in association with VSTY Ltd. and APIDC. The company manufactures paper and paperboard plant, commissioned in April 1991. The new 120000-tpa coated paperboard plant, commissioned in April 1998, was eligible for exemption under the sales tax deferment scheme form 14 years. This plant gave the company a strong position in the paperboards segment. The company had the advantage of getting cheap wood as it had its own plantation.
History of ITC Ltd. (i.e., Merged Company)
ITC Ltd. (hereinafter referred to as ITCL) was incorporated on 24th August 1910 as a private Limited Company under the name imperial Tobacco Co. of India Ltd. The Company under the name imperial Tobacco Co, of India Ltd,. The Company manufacture s cigarettes, smoking tobaccos, pulp, marine products, specialty papers including cigarette tissue papers, tobacco leaf processing, printing and packaging, hotels, food etc. The company was converted into a public Limited Company on 27th October 11954. The name of the company was changed from the imperial Tobacco Co. of India Ltd, into India Tobacco Co. Ltd, in May 1970.
Effectiveness of merger and its impact on the Shareholders of merging company – IBPL.
It is observed from the table 6.13 and 6.14 that IBPL made profit (i.e. net profit margin of 6.07%) in the first year before merger but it suffered losses during second (i.e –7.49%) and third year (-29.77%) before merger it is because, the company’s performance was affected due to excess capacity in the domestic and international markets, sluggish demand growth and the resultant fierce price competition. The average net profit margin during pre-merger period was –10.40%. accordingly the RONW also shown negative results. The average RONW was –7.81%. During post-merger period, NP margin and RONW both improved significantly by 336.54% and 433.67% respectively.
It is also noticed that, there is a substantial improvement in the leverage ratio in the post-merger period. The average pre-merger leverage ratio declined from 1.13 to 0.02 (ie. Decline by 98.23%).
The only minor loss is dilution in the liquidity ratio. The average liquidity ratio of 1.74 (pre-merger) declined to 1.07.
EPS of IBPL was negative before merger except the first year before merger. The overall average EPS during pre-merger period was Rs. –3.61. However, after merger the EPS improved substantially. The average EPS during post-merger stood at Rs.4.3, representing 219.94% improvement over the pre-merger EPS.
In terms of dividend, the shareholders never got the dividend before merger, but during post –merger period, shareholders are continuously given dividend. The average DPS during post-merger period is Rs. 1.8.
In terms of market price of the share also the shareholders are benefited. The pre-merger average market price per share was Rs.42.6, but after merger it raise to Rs.54.51.
However, the greatest loss to the shareholders is only decline in the BVPS. The average pre-merger BVPS of Rs. 43.79 fell to Rs. 16.54, representing decline by 62.23%. This is mainly due to adjustment of lower swap ratio for the merging company (which is 1:16). Considering the net worth of both the companies, the swap ratio exchanged is very less.
Thus, the shareholders are benefited substantially in terms of EPS, DPS, P/E ratio and marginally in terms of share price.
Effectiveness of merger and its impact on the shareholders of merged company – ITCL
It observed from the table – 6.15 and 6.16 that profitability ratios have been improved in the post merger period, but the synergy gain went to the acquired company. This happened because of low profitability of acquired company in the pre-merger period. The net profit margin declined in the year and first year after merger and then it started increasing.
It is also noticed in the table that there is a continuous decline in the RONW of the company upto two years after merger and then it increased.
There is noticeable growth in terms of sales and reserves and surplus. The pre-merger average sales of Rs. 4402.47 crores and reserves and surplus of Rs. 2910.15 crores increased to Rs. 6868.65 crores and Rs. 6308.89 crores respectively after merger.
ITCL is also benefited in terms of huge tax savings (i.e. Rs112 crores). IBPL had an accumulated losses of Rs. 122 crores and unabsorbed depreciation of Rs. 200 crores.
On the basis of key indicators of pre-merger period, it is judged that ITCL is a healthy company. Profitability of the company is not affected even after a loss making company is merger with the company. All the key Indicators have shown substantial increase in post – merger period. The pre-merger average EPS of Rs. 32.90 is increased to Rs. 69.24, representing more than duple (i.e. increased by 110.46%). Average DPS increased from Rs. 7.67 to Rs. 22.00, representing 186.83% and average BVPS increased from Rs. 91.11 to Rs. 264.56 (i.e. 190. 37% increase).
The only disadvantage of the merger is decline in the P/E ratio. The P/E ratio started showing continuous declining tendency from the first year before merger. In that year it declined from 27.07 to 17.71. The pre-merger average P/E ratio of 26.09 declined to 12.59, representing decline by 51.74%. The reason for substantial decrease in the second and third year after merger it increased substantially. The overall average market price shown just 6.76% increase over the pre-merger price.
From the above analysis, it is concluded that, the merger helped both the companies to increase their profitability. However, since the merging company was loss making before merger, most of the synergy went to the merging company and its shareholders.
The shareholders of merging (loss making company are benefited substantially in terms of EPS, DPS, P/E ratio and marginally in terms of share price. However, the BVPS of merging company declined substantially due to adjustment of lower swap ratio for the margining company (which is 1:16). Considering the networth of both the companies, the swap ratio exchanged is very less.
History of ITC Bhadrachalam paper Boards Ltd. (i.e., Merging Company)
ITC Bhadrachalam paper Boards Ltd. (hereafter referred to as IBPL) was incorporated ass Bhadrachalam Paperboards Ltd, on 17th July 1975 by ITC Ltd, in association with VSTY Ltd. and APIDC. The company manufactures paper and paperboard plant, commissioned in April 1991. The new 120000-tpa coated paperboard plant, commissioned in April 1998, was eligible for exemption under the sales tax deferment scheme form 14 years. This plant gave the company a strong position in the paperboards segment. The company had the advantage of getting cheap wood as it had its own plantation.
History of ITC Ltd. (i.e., Merged Company)
ITC Ltd. (hereinafter referred to as ITCL) was incorporated on 24th August 1910 as a private Limited Company under the name imperial Tobacco Co. of India Ltd. The Company under the name imperial Tobacco Co, of India Ltd,. The Company manufacture s cigarettes, smoking tobaccos, pulp, marine products, specialty papers including cigarette tissue papers, tobacco leaf processing, printing and packaging, hotels, food etc. The company was converted into a public Limited Company on 27th October 11954. The name of the company was changed from the imperial Tobacco Co. of India Ltd, into India Tobacco Co. Ltd, in May 1970.
Effectiveness of merger and its impact on the Shareholders of merging company – IBPL.
It is observed from the table 6.13 and 6.14 that IBPL made profit (i.e. net profit margin of 6.07%) in the first year before merger but it suffered losses during second (i.e –7.49%) and third year (-29.77%) before merger it is because, the company’s performance was affected due to excess capacity in the domestic and international markets, sluggish demand growth and the resultant fierce price competition. The average net profit margin during pre-merger period was –10.40%. accordingly the RONW also shown negative results. The average RONW was –7.81%. During post-merger period, NP margin and RONW both improved significantly by 336.54% and 433.67% respectively.
It is also noticed that, there is a substantial improvement in the leverage ratio in the post-merger period. The average pre-merger leverage ratio declined from 1.13 to 0.02 (ie. Decline by 98.23%).
The only minor loss is dilution in the liquidity ratio. The average liquidity ratio of 1.74 (pre-merger) declined to 1.07.
EPS of IBPL was negative before merger except the first year before merger. The overall average EPS during pre-merger period was Rs. –3.61. However, after merger the EPS improved substantially. The average EPS during post-merger stood at Rs.4.3, representing 219.94% improvement over the pre-merger EPS.
In terms of dividend, the shareholders never got the dividend before merger, but during post –merger period, shareholders are continuously given dividend. The average DPS during post-merger period is Rs. 1.8.
In terms of market price of the share also the shareholders are benefited. The pre-merger average market price per share was Rs.42.6, but after merger it raise to Rs.54.51.
However, the greatest loss to the shareholders is only decline in the BVPS. The average pre-merger BVPS of Rs. 43.79 fell to Rs. 16.54, representing decline by 62.23%. This is mainly due to adjustment of lower swap ratio for the merging company (which is 1:16). Considering the net worth of both the companies, the swap ratio exchanged is very less.
Thus, the shareholders are benefited substantially in terms of EPS, DPS, P/E ratio and marginally in terms of share price.
Effectiveness of merger and its impact on the shareholders of merged company – ITCL
It observed from the table – 6.15 and 6.16 that profitability ratios have been improved in the post merger period, but the synergy gain went to the acquired company. This happened because of low profitability of acquired company in the pre-merger period. The net profit margin declined in the year and first year after merger and then it started increasing.
It is also noticed in the table that there is a continuous decline in the RONW of the company upto two years after merger and then it increased.
There is noticeable growth in terms of sales and reserves and surplus. The pre-merger average sales of Rs. 4402.47 crores and reserves and surplus of Rs. 2910.15 crores increased to Rs. 6868.65 crores and Rs. 6308.89 crores respectively after merger.
ITCL is also benefited in terms of huge tax savings (i.e. Rs112 crores). IBPL had an accumulated losses of Rs. 122 crores and unabsorbed depreciation of Rs. 200 crores.
On the basis of key indicators of pre-merger period, it is judged that ITCL is a healthy company. Profitability of the company is not affected even after a loss making company is merger with the company. All the key Indicators have shown substantial increase in post – merger period. The pre-merger average EPS of Rs. 32.90 is increased to Rs. 69.24, representing more than duple (i.e. increased by 110.46%). Average DPS increased from Rs. 7.67 to Rs. 22.00, representing 186.83% and average BVPS increased from Rs. 91.11 to Rs. 264.56 (i.e. 190. 37% increase).
The only disadvantage of the merger is decline in the P/E ratio. The P/E ratio started showing continuous declining tendency from the first year before merger. In that year it declined from 27.07 to 17.71. The pre-merger average P/E ratio of 26.09 declined to 12.59, representing decline by 51.74%. The reason for substantial decrease in the second and third year after merger it increased substantially. The overall average market price shown just 6.76% increase over the pre-merger price.
From the above analysis, it is concluded that, the merger helped both the companies to increase their profitability. However, since the merging company was loss making before merger, most of the synergy went to the merging company and its shareholders.
The shareholders of merging (loss making company are benefited substantially in terms of EPS, DPS, P/E ratio and marginally in terms of share price. However, the BVPS of merging company declined substantially due to adjustment of lower swap ratio for the margining company (which is 1:16). Considering the networth of both the companies, the swap ratio exchanged is very less.
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