Company A has Equity value of $1,000 and Net Income of $100
Company B has equity value of $2,000 and Net Income of $50
Both have 10 shares outstanding
Company A wants to buy company B
In an all stock deal, how much in EBIT synergies must be realized for the deal to be accretion/dilution neutral? Tax rate = 40%
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4,000?
In an all stock deal, if the buyer's P/E > seller's P/E wouldn't it be dilutive regardless if the question assumes same tax rate, no premium etc?
Would it be 83.3 of EBIT synergies? Company A EPS is 10, Company B is 5. Need to get company B EPS to 10. That means the company needs an extra 50 in post-tax income, or 83 dollars in pre-tax income. Now company B's EPS is 10, which matches Company A's, and therefore accretive/dilution netural.
Do the equity values imply that company b share holders would need to receive shares in the combined entity 1:2 for it to go through? Then synergies would need to be 2x that
I believe the answer is $210. My math is as follows:
Company A has to issue 20 shares at $100 per share (share price implied by $1,000 equity value / 10 shares) in order to acquire Company B ($2,000 equity value). 20 new shares + 10 existing shares = 30 pro forma shares outstanding. Pro forma net income is $150 ($100 from Company A + $50 from Company B), resulting in $5 EPS. This is obviously dilutive compared to Company A's standalone $10 EPS, so you'll need to back in to how much incremental net income is needed to get you to $10 pro forma EPS (i.e. breakeven). You would need an additional $150 of net income to get to $10 EPS ($150 pro forma net income + $150 net income from synergies / 30 shares outstanding). However, that $150 of net income needs to be grossed up for taxes to get an EBIT figure, so $150/1.4 to account for 40% tax results in $210 EBIT synergies needed to break even.
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Wouldn’t it be $250 in EBIT to get $150 in Net Income as net income would equal 250(1-t) = 250(0.6) = 150
Yes you are correct, that is an arithmetic mistake on my part
I believe it would be 250 b/c divide 150/(1-tax rate) = 150/.6 = 250 EBIT synergies.
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