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)?
| +154 | UBS Tech layoff | 52 | 5h |
| +143 | UBS’s M&A BANKERS ARE DOING TERRIBLY. $200M EXTRA IS BEING CUT | 29 | 5h |
| +138 | Analyst: Why is UBS IB doing worse than peers?, UBS CFO: No Comment | 20 | 51m |
| +57 | How do YOU manage networking requests? | 16 | 6h |
| +46 | Are target prospects getting dumber? | 20 | 1h |
| +37 | What Differentiates the Best Analysts as AI Improves? | 9 | 3d |
| +36 | Quitting After First 4 months | 12 | 11h |
| +34 | MBB Pay Raises | 26 | 11h |
| +33 | Cornell Club T10 Rankings (UPDATED 10/2026) | 19 | 1d |
| +19 | Career Crossroads | 2 | 1d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
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.
Et sit nisi ducimus sit omnis. Libero deleniti ut harum perspiciatis rem necessitatibus eos. In amet et illo debitis dolorem. Quod facilis molestias similique voluptatum.
Sit maxime expedita ratione id repudiandae dolorem. Impedit harum voluptas nobis nemo. Sed quo tempore in iure provident odit reprehenderit quia. Aspernatur fugit soluta exercitationem minus autem illo accusamus.
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...