MERGER OF ALCHEME ORGANICS LTD. WITH AARTI INDUSTRIES LTD.

Brief history of the merging and merged companies and scheme of merger

History of Alchemie Organics Ltd., (i.e., Merging Company)

Alchemie Organics Ltd, (hereinafter referred to as AOL) is located in Thane (of Maharastra state) and plant is in Valsad district (of Gujrat state). Alchemie Organics Ltd, manufacture the products like cafeine, dye vaccine, phenol etc. The company was a subsidiary of AIL.

History of Aarti Industries Ltd. (i.e. Merger Company)

Aarti industries Ltd, (hereinafter referred to as AIL) was incorporated on 28^th September 1984 as a private limited company and later was converted into a public limited company on 12^th October 1990. The registered office is located in Tarapur (in Thane district of Maharashtra). The company was promoted by C.V Gogri and others belonging to Alchemie group. The main objective of the Company is to manufacture organic and inorganic chemicals and allied products which include. The plants of the company are located two in Vapi (Gujarat), one each in Sarigam (Gujarat), Jhagadia (Gujarat), Tarapur (Mmbai) and in Goregon (Mumbai). All has the largest installed capacity in the domestic industry at 24,000 metric tons per annum of ONCB and PNCB. Aarti Healthcare Ltd, Aarti corporate Services Ltd. and Avinash Drugs Ltd, are the subsidiaries of the company.

Effectiveness of merger and its impact of the shareholders of Merging company

AOL

It is observed from the company was profitable before merger except the year Y­_-1 (i.e., 2000-01) is the year 2000-01. The company incurred losses on account of increased cost of manufacturing for some of its products and increased overheads on account of development of new products introduced during the year. However, after merger the company’s profitable position improved. The average per-merger net profit margin increased from 1.35% to 6.81%. which represents more than 4 times and pre-merger average RONW has increased from 4.40% to 21.00%, representing increased by 377.27%.

The pre-merger liquidity ratio also improved from 1.36 to 3.03, which represents increased by 122.79%.

It is also observed from the post-merger operations are financed largely by external borrowings. The pre-merger leverage ratio increased from 0.84 to 1.11 representing 32.14% increase.

It is observed from the table that the shareholder of merging entity, AOL were not satisfied with the result during Pre-merger period Because in the last year before the merger EPS was very less. In the year Y_-1 it was Rs. –2.65 and in the year Y_-2 Re. 0.98. The average pre-merger EPS was just Rs. 1.45, which substantially increased to an effective EPS of Rs. 5.50 during post merger, representing increase by 279.31%.

Since the company suffered losses in the first year before merger, shareholders could not get any dividend. Even before it, the company has paid less rate of dividend. The average DPS during pre-merger period was just Rs. 0.57. However, during post-merger period, it saw a substantial increase reaching to Rs. 2.01, representing increase by 252.63%.

The average per-merge P/E ratio increase from 4.45 to 8.88 representing an increase by 99.55%. It indicates that the extent of safety investing in the shares of such company is increased.

However, the average BVPS increased marginally. It increased from Rs. 25.76 to Rs. 26.43 (i.e. increased by just 2.60%).

It is also clear from the table that the reactions of the market is positive. The effective average market share price increased substantially from Rs. 12.35 to 36.86 during post-merger period (i.e. increase by 198.46%). Only on the year of merger, the share price saw a small correction.

Effectiveness of merger and its impact on the shareholders of merger company-

ALL

It is observed from the table 6.7 and 6.8 that the company attained an increased net profit margin during the post-merger period. It earned an jumped to 6.81% during post-merger period, representing increase by 16.81% during post merger period, representing increase by merger period. An average RONW during pre-merger period was just 14.41% After the merger RONW during pre-merger period was just 14.41% After the merger. It increased to 21.00% (i.e. 45.73% increase).

However, there is a little negative impact on the liquidity and leverage ratios. Liquidity ratio marginally decreased from 3.13 to 3.03 i.e., –3.19% decrease) and liquidity ratio increased to 21.00%./ (i.e., 45.73% increase).

A substantial increase is seen in the sales after merger. The pre-merger average sales of Rs. 265.73 crores, increased to Rs. 539.24 (i.e., 102.93% increases). It indicates that the company has been successful in maximum utilization of the plant.

It is also notice that the company has witnessed healthy growth in the post-merger reserves and surplus position. The average pre-merger reserves and surplus increased from Rs. 88.02 crores to Rs. 88.02 crores to Rs. 154.5 crores (75.59% increase).

Form the analysis, it is concluded that the merged entity (i.e AIL) also benefit from the merger. However, the merger. Because, merging company (i.e. AOL). The merging entity is relatively much benefited after merger. Because, merging company (ie. AOL) was incurring huge material cost and manufacturing cost during pre-merger period. The material cost was as high as 74.36% as compared to 51.30% of AIL. Due to this reason, the company’s net profit margin was effected it was as low as 1.35% compared to 5.83% of AIL.

It is true that EPS of the company was fairly good and consistent during pre-merger period. However, during post – merger period, it still increased and maintained consistency. The average EPS during pre-merger period. The average pre-merger BVPS of Rs. 54.10 increased to Rs. 15.71 during post-merger period, representing and increase by 95.40%.

During pre-merger period, the average market price was as low as Rs. 35.94. it increased sharply and trraded at an average value of Rs. 147.44, nearly more than four times high. It indicated that the market has positive reaction to the merger.

From the analysis, it is concludes that, both merging and merged companies are benefited from the merger in term of post-merger financial performance. However, the most of synergy gain went to the merging company. The average post-merger N.P margin and RONW increased by 404.44% and 377.27% respectively in case of AOL as against 16.81% and 45.73% in case of AIL. However, the relative benefit in terms of BVPS is less in the case of AOL. BV{S increased in AOL by just 2.60% as against 95.40% (in AIL) This is due to setting smaller exchange ratio in favour of AOL.

The merger resulted in substantial increase in the sales and reserves and surplus. Sales almost doubled (i.e 102.93%) and reserved and surplus increased by 75.59%).