NMIMS

STRATEGIC FINANCIAL MANAGEMENT

APPLICABLE FOR JUNE 2022 EXAMINATIONS

1. A Financial Express news article of February 3, 2022 mentioned that Alphabet, on

February 1, 2022 has announced that its Board of Directors has approved and declared a
20-for-1 stock split. In light of this news, explain what is a stock split and how is it different
from a bonus issue made by the company?

Answer:

Share Split:

A share split is a method to increase the number of outstanding shares througha

proportional reduction in the par value of the share. A share split affects onlythe par value
and the number of outstanding shares; the shareholders’ totalfunds remain unaltered.
Example: The following is the capital structure of Walchand Sons & Company
Paid-up share capital (1 crore ` 10 par) 10
Share premium 15
Reserves and surplus 8
Total net worth 33
Walchand Company split their shares two-for-one. The capitalization ofthe company after
the split is as follows:
Paid-up share capital (2 crore Rs 5 par) 10
Share premium 15
Reserves and surplus 8
Total net worth 33
The following are reasons for splitting of a firm’s ordinary shares:

 To make shares attractive: The main purpose of a stock split is toreduce the market
price of the share in order to make it attractive to investors.With reduction in the
market price of the share, the shares of the company areplaced in a more popular
trading range.Thus, the reduction in the marketprice, caused by the share split,
motivates more investors, particularly thosewith small savings, to purchase the
shares. This helps in increasing themarketability and liquidity of a company’s shares.
 Indication of higher future profits: The share splits are used by thecompany
management to communicate to investors that the company isexpected to earn
higher profits in future. The market price of high-growth firm’sshares increases very
fast. If the shares are not split periodically, they fall outsidethe popular trading
range. Therefore, these companies resort to share splitsfrom time to time. The share
split like bonus shares, thus, has an informationalvalue that the firm is expected to
perform efficiently and profitably and that theshares have been split to avoid future
high price per share.
 Increased dividend: When the share is split, seldom does a companyreduce or
increase the cash dividend per share proportionately. However, thetotal dividends of
a shareholder increase after a share split. The increased dividends may favorably
affect the after-split market price of theshare. It should be noted that the share split
per se has no effect on the marketprice of share.

Bonus Shares:

An issue of bonus shares is the distribution of shares free of cost to the

existingshareholders. In India, bonus shares are issued in addition to the cash dividendand
not in lieu of cash dividend. Hence, companies in India may supplementcash dividend by
bonus issues. Issuing bonus shares increases the number ofoutstanding shares of the
company. The bonus shares are distributedproportionately to the existing shareholder.
Hence there is no dilution ofownership. Example: If a shareholder owns 100 shares at the
time when a 10per cent (i.e., 1:10) bonus issue is made, she will receive 10 additional
shares.The declaration of the bonus shares will increase the paid-up share capital andreduce
the reserves and surplus (retained earnings) of the company. The totalnet worth (paid-up
capital plus reserves and surplus) is not affected by thebonus issue. In fact, a bonus issue
represents a recapitalization of reservesand surplus. It is merely an accounting transfer from
reserves and surplus topaid-up capital.

Example: The Effect of Bonus Share

The following is the capital structure of Walchand Sons & Company: Walchand pays bonus
shares in 1:10 ratio. At the time of the issue ofbonus shares, the market price per share is `
30. The bonus shares are issuedat the market price - a premium of ` 20 over the face value
of ` 10 each share.
` in crore
Paid-up share capital (1crore shares, ` 10 par) 10
Share premium 15
Reserves and surpluses 8
Total net worth 33

A 1:10 bonus issue implies an issue of 10 lakh new shares to the existingshareholders. Thus,
a shareholder holding 10 shares shall get one additionalshare. At a price of ` 30 per share,
the total value of new shares issued will be` 3 crore. This amount would be transferred from
the reserves and surplusaccount into the paid-up share capital account and the share
premium account.The share capital account will be increased by ` 1 crore (10 lakh × ` 10)
and theremaining ` 2 crore will be transferred to the share premium account. The
newcapitalization will be as follows:
` in crore
Paid-up share capital (1.10 crore shares, ` 10 par) 11
Share premium 17
Reserves and surpluses 5
Total net worth 33
Notice that the total net worth of the company does not change by thebonus shares; only
the balance of the paid-up share capital is readjusted.
Bonus Share vs Share Split:

As with the bonus share, the total net worth does not change and the number
ofoutstanding shares increases substantially with the share split. The bonus issueand the
share split are similar except for the difference in their accountingtreatment. In the case of
bonus shares, the balance of the reserves and surplusesaccount decreases due to a transfer
to the paid-up capital and the share premiumaccounts. The par value per share remains
unaffected. With a share split, thebalance of the equity accounts does not change, but the
par value per sharechanges. The earnings per share will be diluted and the market price per
sharewill fall proportionately with a share split. But the total value of the holdings of
ashareholder remains unaffected with a share split.

2. For the first time any BBB-rated Asian company outside of Japan has issued a 40-year
dollar bond. In January 2022, Resilience Ltd. raised $1.5 billion in a 10-year issue at a
coupon or interest rate of 2.875%, $1.75 billion in a 30-year bond at a 3.625% and $750
million in a 40-year issue at a 3.75% coupon rate. The coupon frequency for the 30-year
bond is semi-annual and for the others is annual. You’re required to compute the value of
the bonds if their face value is $1,000 and the applicable rate is 6.9 percent.

Answer:

Face Value $1,000.00

Discount Rate 6.90%

Frequenc
Tenor Interest Rate y Coupon
10 2.875% 1 $28.75
30 3.625% 2 $18.13
40 3.750% 1 $37.50
 Value of Bond:10 Year Maturity
Yea
r Cashflow PVIF PV
0   0  
1 28.75 0.9355 26.89
2 28.75 0.8751 25.16
3 28.75 0.8186 23.53
4 28.75 0.7658 22.02
5 28.75 0.7163 20.59
6 28.75 0.6701 19.27
7 28.75 0.6268 18.02
8 28.75 0.5864 16.86
9 28.75 0.5485 15.77
10 1028.75 0.5131 527.88

Value of Bond = $715.99

Value of Bond:30 Year Maturity

Year Cashflow PVIF PV
0.0   0  
0.5 18.125 0.9672 17.53
1.0 18.125 0.9355 16.96
1.5 18.125 0.9048 16.40
2.0 18.125 0.8751 15.86
2.5 18.125 0.8464 15.34
3.0 18.125 0.8186 14.84
3.5 18.125 0.7917 14.35
4.0 18.125 0.7658 13.88
4.5 18.125 0.7406 13.42
5.0 18.125 0.7163 12.98
5.5 18.125 0.6928 12.56
6.0 18.125 0.6701 12.15
6.5 18.125 0.6481 11.75
7.0 18.125 0.6268 11.36
7.5 18.125 0.6063 10.99
8.0 18.125 0.5864 10.63
8.5 18.125 0.5671 10.28
9.0 18.125 0.5485 9.94
9.5 18.125 0.5305 9.62
10.0 18.125 0.5131 9.30
10.5 18.125 0.4963 9.00
11.0 18.125 0.4800 8.70
11.5 18.125 0.4643 8.41
12.0 18.125 0.4490 8.14
12.5 18.125 0.4343 7.87
13.0 18.125 0.4200 7.61
13.5 18.125 0.4063 7.36
14.0 18.125 0.3929 7.12
14.5 18.125 0.3800 6.89
15.0 18.125 0.3676 6.66
15.5 18.125 0.3555 6.44
16.0 18.125 0.3438 6.23
16.5 18.125 0.3326 6.03
17.0 18.125 0.3216 5.83
17.5 18.125 0.3111 5.64
18.0 18.125 0.3009 5.45
18.5 18.125 0.2910 5.27
19.0 18.125 0.2815 5.10
19.5 18.125 0.2722 4.93
20.0 18.125 0.2633 4.77
20.5 18.125 0.2547 4.62
21.0 18.125 0.2463 4.46
21.5 18.125 0.2382 4.32
 22.0 18.125 0.2304 4.18
22.5 18.125 0.2228 4.04
23.0 18.125 0.2155 3.91
23.5 18.125 0.2085 3.78
24.0 18.125 0.2016 3.65
24.5 18.125 0.1950 3.53
25.0 18.125 0.1886 3.42
25.5 18.125 0.1824 3.31
26.0 18.125 0.1764 3.20
26.5 18.125 0.1706 3.09
27.0 18.125 0.1650 2.99
27.5 18.125 0.1596 2.89
28.0 18.125 0.1544 2.80
28.5 18.125 0.1493 2.71
29.0 18.125 0.1444 2.62
29.5 18.125 0.1397 2.53
1018.12
30.0 5 0.1351 137.55

Value of Bond = $597.20

Value of Bond:40 Year Maturity

Year Cashflow PVIF PV
0   0  
1 37.5 0.9355 35.08
2 37.5 0.8751 32.82
3 37.5 0.8186 30.70
4 37.5 0.7658 28.72
5 37.5 0.7163 26.86
6 37.5 0.6701 25.13
7 37.5 0.6268 23.51
8 37.5 0.5864 21.99
9 37.5 0.5485 20.57
10 37.5 0.5131 19.24
11 37.5 0.4800 18.00
12 37.5 0.4490 16.84
13 37.5 0.4200 15.75
14 37.5 0.3929 14.73
15 37.5 0.3676 13.78
16 37.5 0.3438 12.89
17 37.5 0.3216 12.06
18 37.5 0.3009 11.28
19 37.5 0.2815 10.55
20 37.5 0.2633 9.87
21 37.5 0.2463 9.24
22 37.5 0.2304 8.64
23 37.5 0.2155 8.08
24 37.5 0.2016 7.56
25 37.5 0.1886 7.07
26 37.5 0.1764 6.62
27 37.5 0.1650 6.19
28 37.5 0.1544 5.79
29 37.5 0.1444 5.42
30 37.5 0.1351 5.07
31 37.5 0.1264 4.74
32 37.5 0.1182 4.43
33 37.5 0.1106 4.15
34 37.5 0.1035 3.88
35 37.5 0.0968 3.63
36 37.5 0.0905 3.39
37 37.5 0.0847 3.18
 38 37.5 0.0792 2.97
39 37.5 0.0741 2.78
40 1037.5 0.0693 71.93

Value of Bond = $575.13

3. In India, the year of 2021 saw an immense surge in mergers and acquisitions. This was
mainly propelled by first-time buyers and steered by a growth of industry disruptors
across multiple sectors and business activities. The acquisition of Indian payments giant
BillDesk by technology investors Prosus NV was the largest merger and acquisition deal in
the Indian fintech industry. Prosus has its own Fintech business PayU. This acquisition will
help PayU to become one of the leading online payments providers, globally, with
presence in over 20 markets and increased total payments volume (TPV) of over US$4
billion.

a. With this deal in backdrop, explain mergers and acquisitions as a restructuring tool.
b. Identify and explain the type of merger seen here. Also, elucidate the other types of
mergers and acquisitions in brief.

Answer:

a)

Why do mergers take place? It is believed that mergers and acquisitions arestrategic
decisions leading to the maximization of a company’s growth byenhancing its production
and marketing operations. They have become popularin the recent times because of the
enhanced competition, breaking of tradebarriers, free flow of capital across countries and
globalization of business as anumber of economies are being deregulated and integrated
with othereconomies. A number of reasons are attributed for the occurrence of mergersand
acquisitions. For example, it is suggested that mergers and acquisition areintended to:
 • Limit competition
• Utilize under-utilized market power
• Overcome the problem of slow growth and profitability in one’s own industry
• Achieve diversification
• Gain economies of scale and increase income with proportionately lessinvestment
• Establish a transnational bridgehead without excessive start-up costs togain access
to a foreign market
• Utilize under-utilized resources—human and physical and managerial skills
• Displace existing management
• Circumvent government regulations
• Reap speculative gains attendant upon new security issue or change inP/E ratio
• Create an image of aggressiveness and strategic opportunism, empirebuilding and to
amass vast economic powers of the company.

Acquisition may be defined as an act of acquiring effectivecontrol over the assets or

management of a company by another companywithout any combination of businesses or
companies. A substantial acquisitionoccurs when an acquiring firm acquires substantial
quantity of shares or votingrights of the target company. Thus, in an acquisition, two or
more companiesmay remain independent, separate legal entity, but there may be change
incontrol of companies. An acquirer may be a company or persons acting in concertthat act
together for the purpose of substantial acquisition of shares or votingrights or gaining
control over the target company.

Corporate restructuring refers to the changes in ownership, business mix,assets mix and
alliances with a view to enhance the shareholder value. Hence,corporate restructuring may
involve ownership restructuring, businessrestructuring and assets restructuring. A company
can affect ownershiprestructuring through mergers and acquisitions, leveraged buy-outs,
buybackof shares, spin-offs, joint ventures and strategic alliances. Businessrestructuring
involves the reorganization of business units or divisions. Itincludes diversification into new
businesses, out-sourcing, divestment, brandacquisitions, etc. Asset restructuring involves
the acquisition or sale of assetsand their ownership structure. The examples of asset
restructuring are saleand leaseback of assets, securitization of debt, receivable factoring,
etc.

The basic purpose of corporate restructuring is to enhance the shareholdervalue. A

company should continuously evaluate its portfolio of businesses, capitalmix and ownership
and assets arrangements to find opportunities for increasingthe shareholder value. It should
focus on assets utilization and profitableinvestment opportunities, and reorganize or divest
less profitable or loss-makingbusinesses/products. The company can also enhance value
through capitalrestructuring; it can design innovative securities that help to reduce the cost
ofcapital.

b)

A merger is said to occur when two or more companies combine into onecompany. One or
more companies may merge with an existing company orthey may merge to form a new
company. In merger, there is completeamalgamation of the assets and liabilities as well as
shareholders’ interests andbusinesses of the merging companies. There is yet another mode
of merger.Here, one company may purchase another company without giving
proportionateownership to the shareholders’ of the acquired company or without
continuingthe business of the acquired company.1 Laws in India use the term amalgamation
for merger.
Example: Section 2(1A) of the Income Tax Act,1961 defines amalgamation as the merger of
one or more companies (called amalgamating company or companies) with another
company (called amalgamated company) or the merger of two or more companies to form
anew company in such a way that all assets and liabilities of the amalgamatingcompany or
companies become assets and liabilities of the amalgamatedcompany and shareholders
holding not less than nine-tenths in value of theshares in the amalgamating company or
companies become shareholders ofthe amalgamated company. In this unit, the terms
merger and amalgamationhave been used interchangeably. Merger or amalgamation may
take the following two forms:

• Merger through absorption

• Merger through consolidation

Various types of merger are as follows:

• Horizontal merger: This is a combination of two or more firms in similartype of

production, distribution or area of business. Example: Combining oftwo book
publishers or two luggage manufacturing companies to gain dominantmarket share.
• Vertical merger: This is a combination of two or more firms involved indifferent
stages of production or distribution. Example: Joining of a TVmanufacturing
(assembling) company and a TV marketing company or the joiningof a spinning
company and a weaving company. Vertical merger may take theform of forward or
backward merger. When a company combines with thesupplier of material, it is
called backward merger and when it combines with thecustomer, it is known as
forward merger.
• Conglomerate merger: This is a combination of firms engaged inunrelated lines of
business activity. A typical example is merging of differentbusinesses like
manufacturing of cement products, fertilizers products, electronicproducts,
insurance investment and advertising agencies. Voltas Ltd. is anexample of a
conglomerate company.

In the question it is given that, In India, the year of 2021 saw an immense surge in mergers
and acquisitions. This was mainly propelled by first-time buyers and steered by a growth of
industry disruptors across multiple sectors and business activities. The acquisition of Indian
payments giant BillDesk by technology investors Prosus NV was the largest merger and
acquisition deal in the Indian fintech industry. Prosus has its own Fintech business PayU.
This acquisition will help PayU to become one of the leading online payments providers,
globally, with presence in over 20 markets and increased total payments volume (TPV) of
over US$4 billion.Therefore, it is a case of Horizontal merger because it is in the same field
of business to create monopoly in their business.