Unit study guide · NISM Series IX
Other Merchant Banking Activities-Mergers, Acquisitions & Takeovers
20 questions in this unit
What this unit covers
- Two competing manufacturers of the same product combine their businesses. What type of merger is this?
- A manufacturer acquires its raw-material supplier. What business-combination relationship does this most directly illustrate?
- Can acquiring control of a listed target trigger an open offer even without crossing the shareholding threshold, assuming no exemption?
- What most directly characterises persons acting in concert in a takeover context?
- What minimum offer size generally applies to a mandatory open offer under Regulations 3 and 4?
- A target’s board supports a negotiated acquisition after reviewing its terms. How is the takeover generally described?
- A buyer purchases all shares of a company that has outstanding loans. What happens to those loans solely because the shares change hands?
- Two businesses have standalone values of ₹120 crore and ₹80 crore. Their combined value is ₹230 crore before transaction costs. What is the synergy value?
- A merger offers three acquiring-company shares for every two target-company shares. How many new shares does a holder of 400 target shares receive?
- An acquirer and its concert parties hold 23% in a main-board listed target and agree to acquire another 3%. Assuming no exemption, what threshold result follows?
- A group starts the financial year at 30% and acquires exactly 5% more. There is no control change or other trigger. Does Regulation 3(2) alone require an open offer?
- Starting at 30%, a group buys 4%, sells 3% and buys 3% in one financial year. No exemption applies. What does the annual acquisition test count?
- Which person may be appointed manager to an open offer under Regulation 12(1)?
- Why is an escrow account required in the open-offer process under Regulation 17?
- A mandatory open offer uses a regulatory share base of 2 crore shares. At the minimum offer size and ₹100 per share, what consideration is required?
- All 52-week purchases were 10,000 shares at ₹180 forty weeks ago, 40,000 at ₹220 thirty-five weeks ago and 10,000 at ₹200 ten weeks ago. The negotiated price is ₹205 and the 60-trading-day weighted average is ₹202. For a standard direct acquisition of frequently traded shares, what minimum offer price follows, rounded to two decimals?
- For a standard unconditional direct-acquisition open offer of ₹800 crore, what minimum escrow amount follows the scale in Regulation 17(1)?
- An acquirer owns 24 lakh of a main-board target’s 100 lakh shares and receives all 4 lakh newly issued shares. What holding results, and is 25% crossed?
- An acquirer earns ₹40 crore on 2 crore shares. A target adds ₹12 crore profit, and the merger issues 0.5 crore shares. What is post-merger earnings per share?
- Standalone equity values are ₹200 crore for the buyer and ₹80 crore for the target. Combined equity value before costs is ₹310 crore. With ₹95 crore paid for the target and ₹5 crore transaction costs, what net value does the buyer gain?
Key ideas
From the practice bank · 1
Two competing manufacturers of the same product combine their businesses. What type of merger is this?
This is a horizontal merger because the businesses compete at the same stage of the same product market. Remember: Horizontal mergers combine businesses operating at the same market stage.
Hint Common mistake: Calling every business combination vertical regardless of the parties’ relationship. Compare the businesses’ positions within the same market.
IX-116From the practice bank · 2
A manufacturer acquires its raw-material supplier. What business-combination relationship does this most directly illustrate?
The transaction illustrates vertical integration because it combines businesses at different stages of the same supply chain. Remember: Vertical integration links different stages of production or distribution.
Hint Common mistake: Classifying the deal only by the fact that both companies operate in the same broad industry. Identify whether the acquired business operates before or after the buyer in the supply chain.
IX-117From the practice bank · 3
Can acquiring control of a listed target trigger an open offer even without crossing the shareholding threshold, assuming no exemption?
Yes, acquiring control is a separate open-offer trigger under Regulation 4, subject to applicable exemptions. Remember: Control and shareholding thresholds must be assessed separately.
Hint Common mistake: Assuming a low percentage holding automatically rules out an open-offer obligation. Check whether the takeover rules have more than one kind of trigger.
IX-118From the practice bank · 4
What most directly characterises persons acting in concert in a takeover context?
Persons acting in concert cooperate toward a common acquisition or control objective under an agreement or understanding, which may be formal or informal. Remember: Concerted action concerns a shared acquisition objective and cooperation, not superficial similarities.
Hint Common mistake: Looking only for a written agreement and ignoring an informal understanding. Think about the relationship between purpose and coordinated action.
IX-119From the practice bank · 5
What minimum offer size generally applies to a mandatory open offer under Regulations 3 and 4?
The mandatory offer must cover at least 26% of the target’s total shares on the basis prescribed by Regulation 7(1). That basis uses total shares as of the tenth working day after tendering closes and accounts for the potential increases required by the rule. Remember: The mandatory offer size and the acquisition trigger are different percentages.
Hint Common mistake: Using the 25% acquisition threshold as the required open-offer size. Do not confuse the trigger percentage with the size of the resulting offer.
IX-120From the practice bank · 6
A target’s board supports a negotiated acquisition after reviewing its terms. How is the takeover generally described?
The acquisition is generally described as friendly because the target’s board supports the negotiated transaction. Remember: Friendly and hostile describe the target side’s stance toward a takeover.
Hint Common mistake: Assuming the method of payment alone determines whether a takeover is friendly. Focus on the target management’s response to the acquisition proposal.
IX-121From the practice bank · 7
A buyer purchases all shares of a company that has outstanding loans. What happens to those loans solely because the shares change hands?
The loans remain company obligations because changing share ownership does not by itself cancel or transfer the company’s debts. Remember: A share acquisition changes ownership without automatically extinguishing corporate liabilities.
Hint Common mistake: Treating a sale of shares as though the company’s debts are erased. Distinguish the company’s legal obligations from the identity of its shareholders.
IX-122From the practice bank · 8
Two businesses have standalone values of ₹120 crore and ₹80 crore. Their combined value is ₹230 crore before transaction costs. What is the synergy value?
The synergy value is ₹30 crore because the combination exceeds the sum of standalone values by that amount. Synergy = ₹230 crore − ₹120 crore − ₹80 crore = ₹30 crore. Remember: Synergy is incremental combination value rather than the entire combined value.
Hint Common mistake: Ignoring one standalone business when calculating value created by the merger. Compare the combined value with what the two businesses were worth separately.
IX-123From the practice bank · 9
A merger offers three acquiring-company shares for every two target-company shares. How many new shares does a holder of 400 target shares receive?
The holder receives 600 acquiring-company shares under the stated exchange ratio. Groups = 400 ÷ 2 = 200. New shares = 200 × 3 = 600. Remember: Share-swap consideration depends on the direction of the exchange ratio.
Hint Common mistake: Reversing target shares surrendered and acquiring-company shares received. Count the complete groups of target shares and apply the exchange terms.
IX-124From the practice bank · 10
An acquirer and its concert parties hold 23% in a main-board listed target and agree to acquire another 3%. Assuming no exemption, what threshold result follows?
The group would reach 26%, crossing the 25% trigger under Regulation 3(1), so an open-offer obligation arises absent an exemption. Remember: The initial takeover threshold includes the acquirer and persons acting in concert.
Hint Common mistake: Applying the incremental-acquisition rule before checking the initial threshold. Use the group’s total voting entitlement after the proposed acquisition.
IX-125From the practice bank · 11
A group starts the financial year at 30% and acquires exactly 5% more. There is no control change or other trigger. Does Regulation 3(2) alone require an open offer?
No, exactly 5% does not trigger Regulation 3(2) alone because that provision uses more than 5%, assuming the group remains below the maximum permissible non-public shareholding. Remember: The strict greater-than wording matters when testing the annual acquisition threshold.
Hint Common mistake: Reading more than 5% as 5% or more. Pay close attention to the difference between more than and at least.
IX-126From the practice bank · 12
Starting at 30%, a group buys 4%, sells 3% and buys 3% in one financial year. No exemption applies. What does the annual acquisition test count?
The test counts 7% gross acquisitions because intervening sales do not offset acquisitions for Regulation 3(2). Remember: Selling shares during the year does not reset the gross-acquisition test.
Hint Common mistake: Using only the net change in holdings to test the annual takeover threshold. Check whether selling shares resets the annual acquisition allowance.
IX-127From the practice bank · 13
Which person may be appointed manager to an open offer under Regulation 12(1)?
The manager must be a SEBI-registered merchant banker that is not an associate of the acquirer. Remember: The open-offer manager must meet both registration and non-association requirements.
Hint Common mistake: Checking professional registration while overlooking the independence requirement. Think about potential conflicts between the offer manager and the acquirer.
IX-128From the practice bank · 14
Why is an escrow account required in the open-offer process under Regulation 17?
The escrow account secures performance of the acquirer’s obligations under the open-offer framework. Remember: Open-offer escrow is a performance safeguard rather than freely usable investment capital.
Hint Common mistake: Treating escrow money as unrestricted funds available for any corporate purpose. Connect the restricted funds with the commitments made to accepting shareholders.
IX-129From the practice bank · 15
A mandatory open offer uses a regulatory share base of 2 crore shares. At the minimum offer size and ₹100 per share, what consideration is required?
The consideration is ₹52 crore at the minimum 26% offer size. Shares = 2 crore × 26% = 52 lakh. Consideration = 52 lakh × ₹100 = ₹52 crore, assuming no changes to the given regulatory share base. Remember: Open-offer consideration depends on both the applicable offer quantity and the offer price.
Hint Common mistake: Confusing the initial acquisition threshold with the required offer quantity. Apply the mandatory offer-size percentage before multiplying by the offer price.
IX-130From the practice bank · 16
All 52-week purchases were 10,000 shares at ₹180 forty weeks ago, 40,000 at ₹220 thirty-five weeks ago and 10,000 at ₹200 ten weeks ago. The negotiated price is ₹205 and the 60-trading-day weighted average is ₹202. For a standard direct acquisition of frequently traded shares, what minimum offer price follows, rounded to two decimals?
The minimum offer price is ₹210.00 because the fifty-two-week weighted average is the highest applicable benchmark. Purchase value = 10,000 × ₹180 + 40,000 × ₹220 + 10,000 × ₹200 = ₹1,26,00,000. Weighted average = ₹1,26,00,000 ÷ 60,000 = ₹210. The highest purchase price within twenty-six weeks is ₹200. Comparing ₹210, negotiated ₹205, twenty-six-week highest ₹200 and market weighted average ₹202 gives ₹210.00 to two decimals, assuming no other applicable adjustment or later acquisition. Remember: The highest historical purchase and the weighted-average benchmark use different lookback windows.
Hint Common mistake: Using the highest price from all fifty-two weeks as the twenty-six-week highest-price benchmark. Use the correct observation window for each benchmark, then compare the applicable results.
IX-131From the practice bank · 17
For a standard unconditional direct-acquisition open offer of ₹800 crore, what minimum escrow amount follows the scale in Regulation 17(1)?
The minimum escrow is ₹155 crore under the standard scale. First ₹500 crore × 25% = ₹125 crore. Remaining ₹300 crore × 10% = ₹30 crore. Total = ₹155 crore. The case excludes conditional and special indirect-acquisition requirements. Remember: The ordinary open-offer escrow scale applies different rates to different portions of consideration.
Hint Common mistake: Applying a single rate to the entire offer when the rule uses tiers. Separate the consideration into the first tier and the remaining balance.
IX-132From the practice bank · 18
An acquirer owns 24 lakh of a main-board target’s 100 lakh shares and receives all 4 lakh newly issued shares. What holding results, and is 25% crossed?
The acquirer reaches 26.92%, crossing the 25% threshold absent an exemption. New holding = 24 lakh + 4 lakh = 28 lakh. Enlarged shares = 100 lakh + 4 lakh = 104 lakh. Holding = 28 ÷ 104 × 100 = 26.92%. The shareholding calculation does not postpone any earlier announcement obligation. Remember: Acquisition through new issuance requires an enlarged-denominator calculation.
Hint Common mistake: Updating the acquirer’s shares while leaving the company’s total shares unchanged. Update both the acquirer’s holding and the company’s outstanding shares.
IX-133From the practice bank · 19
An acquirer earns ₹40 crore on 2 crore shares. A target adds ₹12 crore profit, and the merger issues 0.5 crore shares. What is post-merger earnings per share?
Post-merger earnings per share are ₹20.80 when the stated profits apply for the same full period with no other effects. Combined earnings = ₹40 crore + ₹12 crore = ₹52 crore. Combined shares = 2 crore + 0.5 crore = 2.5 crore. Earnings per share = ₹52 crore ÷ 2.5 crore = ₹20.80. Remember: A merger’s earnings-per-share calculation must include both added earnings and issued shares.
Hint Common mistake: Adding the target’s profit without recognising share-swap dilution. Update earnings and shares consistently for the same post-merger period.
IX-134From the practice bank · 20
Standalone equity values are ₹200 crore for the buyer and ₹80 crore for the target. Combined equity value before costs is ₹310 crore. With ₹95 crore paid for the target and ₹5 crore transaction costs, what net value does the buyer gain?
The buyer gains ₹10 crore after paying the premium and costs. Gross synergy = ₹310 crore − ₹200 crore − ₹80 crore = ₹30 crore. Premium = ₹95 crore − ₹80 crore = ₹15 crore. Net gain = ₹30 crore − ₹15 crore − ₹5 crore = ₹10 crore. Remember: Acquisition value retained by the buyer is reduced by the premium and transaction costs.
Hint Common mistake: Calling all merger synergy a gain to the buyer without considering what it pays. Value created is not the same as value retained after the price paid and transaction costs.
IX-135