- July 28, 2022
- Posted by: Ramkumar
- Category: Posts

Shareholder Value At Risk (SVAR) in M&A
One of the mysteries in mergers and acquisitionsย deals, in my experience, is to ๐ฃ๐ฎ๐ฌ๐ญ๐ข๐๐ฒ ๐๐ง ๐๐๐ช๐ฎ๐ข๐ฌ๐ข๐ญ๐ข๐จ๐ง ๐ฉ๐ซ๐๐ฆ๐ข๐ฎ๐ฆ ๐ญ๐ก๐ ๐ฌ๐๐ฅ๐ฅ๐๐ซ ๐๐๐ฆ๐๐ง๐๐ฌ ๐๐ ๐๐ข๐ง๐ฌ๐ญ ๐ญ๐ก๐ ๐๐ฑ๐ฉ๐๐๐ญ๐๐ ๐ฌ๐ฒ๐ง๐๐ซ๐ ๐ข๐๐ฌ ๐๐ซ๐จ๐ฆ ๐ญ๐ก๐ ๐ญ๐ซ๐๐ง๐ฌ๐๐๐ญ๐ข๐จ๐ง. Too often, the acquirer’s share price declines after the announcement of the merger (the recent example is theย Zomato Blinkitย merger) because of the following:
1)The buyer shareholders believe they have paid more.
2)The buyer shareholders think they cannot realize synergies that justify the premium.
In my experience of analyzing and closing multiple M&A deals, i focus on two things:
1)Shareholder Value at Risk (SVAR)
2)Revenues and Cost synergies the buyer must achieve to justify the premium
In this post, i will talk about SVAR.
Shareholder value at risk = Premium paid for the deal/Market price of the buyer pre-deal
For instance, if the buyer pays a 30% premium, the buyer’s market cap pre-deal is 1000, and the seller’s market cap pre-deal is 100,
Deal Value = 100(1+30%) = 130
Seller Value/Buyer value = 100/1000 = 10%
Shareholder value at risk = 10%30% = 3%
Thus, the buyer must achieve at least 3% of synergies to break even.
Therefore, the function of the buyer’s stock price movement post-deal announcement is a function of:
1)๐ง๐ต๐ฒ ๐ฑ๐ฒ๐ฎ๐น ๐๐ฎ๐น๐๐ฒ – Higher the size of the seller relative to the buyer, the higher the risk
2)๐ฃ๐ฟ๐ฒ๐บ๐ถ๐๐บ – Higher the premium, the higher the risk
3)Synergies: How likely can buyers realize projected synergies? Here, the Market looks at the buyer’s track record to assess if the deal succeeds.
๐๐ฌ๐ฌ๐ฎ๐ฆ๐ ๐ญ๐ก๐๐ญ ๐ญ๐ก๐ ๐๐ฎ๐ฒ๐๐ซ ๐ฎ๐ฌ๐๐ฌ ๐ข๐ญ๐ฌ ๐ฌ๐ญ๐จ๐๐ค ๐ญ๐จ ๐ฉ๐๐ฒ ๐ญ๐ก๐ ๐ญ๐๐ซ๐ ๐๐ญ ๐ฌ๐ก๐๐ซ๐๐ก๐จ๐ฅ๐๐๐ซ๐ฌ:
In that case, the buyer’s stake in the combined firm = 1000/1130 = 88.5%
SVAR = 88.5%*3% = 2.65%
The buyer’s SVAR declines with the stock deal against cash deals because the target takes a specific risk in synergies realization.
However, stock deals send negative signals to investors as they assume:
1)Buyer issues its stocks because it is overvalued.
2)If the buyer is confident in realizing synergies, why does it wants to share benefits with the seller
Thus investors treat stock deals negatively compared to cash deals.
In my experience, such ๐๐๐ฟ๐ฎ๐๐ฒ๐ด๐ถ๐ฐ ๐ฎ๐ป๐ฎ๐น๐๐๐ถ๐ ๐ต๐ฎ๐ ๐๐ถ๐ด๐ป๐ถ๐ณ๐ถ๐ฐ๐ฎ๐ป๐ ๐ถ๐บ๐ฝ๐น๐ถ๐ฐ๐ฎ๐๐ถ๐ผ๐ป๐ ๐ณ๐ผ๐ฟ ๐ฎ ๐ฏ๐ผ๐ฎ๐ฟ๐ฑ ๐ฎ๐๐๐ฒ๐๐๐ถ๐ป๐ด ๐ฎ ๐ฑ๐ฒ๐ฎ๐น’๐ ๐๐ฎ๐น๐๐ฒ, ๐ณ๐ผ๐ฟ ๐ถ๐ป๐๐ฒ๐ด๐ฟ๐ฎ๐๐ถ๐ผ๐ป ๐ฝ๐น๐ฎ๐ป๐ป๐ถ๐ป๐ด, ๐ฎ๐ป๐ฑ ๐ด๐๐ถ๐ฑ๐ฎ๐ป๐ฐ๐ฒ ๐ถ๐ป ๐๐ฟ๐ถ๐๐ถ๐ป๐ด ๐ฎ ๐๐ถ๐ป๐ป๐ถ๐ป๐ด ๐ถ๐ป๐๐ฒ๐๐๐ผ๐ฟ ๐ฝ๐ฟ๐ฒ๐๐ฒ๐ป๐๐ฎ๐๐ถ๐ผ๐ป.