Marlow Chemicals Acquires a Rival: Accretive or Not?
Finance
medium55 min0 submissionsMorgan Stanley
Scenario
Marlow Chemicals (specialty chemicals, India) is considering acquiring a smaller competitor.
Acquirer. Net income of ₹213 Cr, 65 crore shares outstanding, trading at ₹75 per share. Current EPS is therefore ₹3.28.
Target. Net income of ₹41 Cr, currently valued by the market at ₹1047 Cr. The board expects to pay a 41% premium to that price.
Management projects ₹46 Cr of annual run-rate synergies, roughly 62% of which are cost synergies from overlapping sales and back-office functions, with the remainder from cross-selling. One-time integration costs are estimated at ₹59 Cr.
The deal would be financed with debt at 7.1%. The marginal tax rate is 25%.
Supporting data
deal
- tax rate pct
- 25
- debt rate pct
- 7.1
- integration cost cr
- 59
- run rate synergies cr
- 46
target
- premium pct
- 41
- net income cr
- 41
- market value cr
- 1047
acquirer
- eps
- 3.28
- share price
- 75
- net income cr
- 213
- shares outstanding
- 65
Your task
Advise the board on whether to proceed. Provide:
- Analysis — accretion/dilution to EPS in year one and at full synergy run-rate.
- Risks — what would make this deal destroy value.
- Recommendation — proceed, renegotiate, or walk. Specify price and structure.
Ready to move forward? Up next: Ferro Industries: Two Projects, One BudgetNext question
How you'll be graded
100 points, 60% to pass.
- deal analysis25
- recommendation25
- risk assessment25
- synergy assessment25
Hint
Reveal suggested structure
- Purchase price = market value × (1 + premium).
- Financing cost = purchase price × debt rate, then after tax.
- Combined earnings = acquirer + target + after-tax synergies − after-tax interest.
- Combined EPS = combined earnings ÷ share count (unchanged in an all-cash deal).
- Compare against standalone EPS. Do this for year 1 (partial synergies, integration costs) and steady state.
- Sanity check the price against the target's standalone value.