Determination of Swap Ratio in Merger: Case of Reliance Natural Resources Ltd. and Reliance Power Ltd. Merger

Abstract

In July 2010, the management of Reliance Power Ltd and Reliance Natural Resources Ltd. announced merger of the two companies and the share exchange ratio was later set at 1:4. Much has been talked and written in financial press on the validity of this swap ratio. In the present study, we have applied three different approaches - discounted cash flow approach, market value approach and Conn and Nielsen model - to calculate share swap ratio between the two companies. Our analysis shows that the swap ratio fixed the management has been justified.