BOX Pharma and Star Pharma – Merger Case

BOX Pharma and STAR Pharma are two successful companies in Pakistan with combined sales of 70
Million a month. BOX has 80% of its sale in Punjab, whereas STAR is market leader in southern Sindh.
Following is their respective data:

BOX STAR

SALES 50 Million 20 Million

After tax EARNINGS – last year 4 Million 2.5 Million

ASSETS 50 Million 16 Million

ALL LIABILITIES 40 Million 10 Million

No of share outstanding 900,000 400,000

Market price of Share 13 18

PE ratios in Pharma industry are in multiples of 3. It is expected that in case of merger the cost of both
firms will decline because of synergies, which will result in increase in profits for both firm. The firm
after merger is expected to have total sales of 75 Million with combined production, operational and
financial cost of 65 Million. The company falls under tax rate of 20% on profits.

BOX has initiated the offer for merger to the STAR to create BOXSTER PAHRMA. The board of STAR
pharma is resisting this merger , as they have a fear that this merger will result in loss of control being
the smaller company in the merger. Box has offered both offers, acquisition as well as merger, as the
benefits of acquisition and merger stand same. The Company has offered an acquisition price of Rs 18
per share for 100% take over of STAR Pharma. The company is willing to provide the shareholders of
Star pharma one share of its own and Rs 7 per share as cash , which will be paid by excess cash available
with STAR (Assume 20% is the opportunity cost of that cash). The board of STAR has decided to accept
offer at Rs 20 per share, with Rs 6 of share as cash.

a) Should STAR agree to take the 18 Rs offer and sell the company

b) Is such acquisition is viable for BOX at Rs 22 ?

c) What will be the market valuation of Box, after acquisition, For both cash and hybrid option

d) Shall BOX agree to one share of Box and Rs 7 as cash or should they give 22 cash.

e) For both cash and hybrid option, make the Balance sheet of Box after acquisition.

f) For merger STAR is asking for 1 share of new firm for each of its share. Is this

a justifiable demand? The new company will have 1,500,00 shares.

g) What will be the market value of the new company after merger?