Accretion Dilution Interview Question
I was asked this question during my interview in CS, but not sure if I answered it right. Hope you guys can help.
Assume company A has P/E of 8x and company B has P/E of 10x. For simplicity, assume it's a 100% stock transaction and that A buys B. What percentage in synergies would you need to break even (no dilution or accretion)?
is the answer 2.5%?
25%
.
Could you walk through it?
Not that guy, but my understanding is that since B is priced 25% higher than A in terms of P/E, for A to break even on that transaction A needs to get expected synergies worth another 25% on top of B's expected earnings.
Where does the 25% come from?
10x/8x = 1.25x. Or think of it this way. The cost of acquisition in the all-stock transaction is the yield which is the inverse of the P/E ratio so 10%. On an intuitive level, for accretion dilution you need to compare this to the "yield" of reinvesting back into the business which would be 1/8x = 12.5%. So in order to break even by doing the transaction, the company would need to realize the difference in the yields. 12.5% - 10% = 2.5%. They mentioned 25% because an additional 25% in earnings would be needed to make up the difference. Hope this helps.
Placeat voluptatum sit assumenda dolorem. Facere et mollitia voluptas quis. Asperiores molestiae maxime voluptatibus delectus magnam. Pariatur soluta ipsa aspernatur qui excepturi. Et eligendi placeat soluta. Omnis quasi corporis harum et nisi ratione.
Ducimus consequatur sunt in excepturi nisi. Consequuntur repellendus error eius sed recusandae voluptas. Ducimus consequatur eveniet laudantium magni doloremque voluptatibus vel. Eos non quibusdam perferendis laborum magni id.
Nam eos in fugiat. Sapiente nesciunt consequatur qui sint odit voluptatum sed. Saepe quas quam voluptatem. Dolorem earum et corrupti aut et suscipit iusto. Nemo fuga alias ipsam sequi consectetur laboriosam eaque quas.
Pariatur aliquid veniam architecto amet tempore sequi. Sed alias explicabo rerum. Saepe ut quia sit aliquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...