accretive/dilutive merger Cash deal not stock swap

not necessarily, since you usually build in an opportunity cost to the cash deployed.

and to follow up with what bigal mentioned, if this 'cash' transaction is financed through debt, there definitely are interest expenses every year to factor in to your final EPS.

i meant if you had the excess cash on hand. of course through debt would be different and i guess you would use an LBO type modeling pro forma

Yes, if using "in-house" cash, it will be accretive if the target net income is greater than new amortization charges (new goodwill & intangible assets from acquisition).

what exactly are amortization charges? i know there is goodwill on the balance sheet from paying a premium for a company. are you saying this is depreciated over time as an expense (noncash charge)

would free cash flows always be better off in the future starting with higher earnings if it was excess cash because you add back any noncash charges.

Let's not forget the forgone interest you lose by spending cash in this deal. If the earnings increase represents a smaller amount of what you could have made by putting your cash into money market funds or other relatively safe investments than your merger will be dilutive.

yeah of course that makes sense.

but can someone go into a bit of depth on amortization charges? i know there is goodwill on the balance sheet from paying a premium for a company. are you saying this is depreciated over time as an expense (noncash charge)

would free cash flows always be better off in the future starting with higher earnings if it was excess cash because you add back any noncash charges.

Isn't there still goodwill amortization related to IRS tax rules. So would there be a deferred tax account somewhere?

So by accounting rules, goodwill cannot be amortized. Every year you can do an impairment test to see if it needs to be written down (can't be written up). In terms of an acquisition, goodwill will be the excess purchase price over the fair market value of the company's net assets. This goodwill will have no future amortization expense.

However, if I understand correctly, a purchase can allow you to assign a value to an intangible item that may not have necessarily have been there before. Under accounting rules, a company cannot develop an intangible "in-house", but if in the purchase (say a company is buying Coca-Cola) they can assign a monetary value to such an intangible as the firm's logo.

By doing so it creates a new intangible that was not present on Coke's balance sheet. Going forward, the acquiring company will have to amortize this intangible, which will cause amortization expense to increase and net income to decrease...which can cause EPS to dilute.

here's the calculation: (simplified for ease of use, there's more mumbo jumbo with financing fees and asset-writeups, etc)

purchase price less: target's book value of equity plus: target existing goodwill & intangibles = Excess Purchase Price (i.e. new goodwill + intangible assets)

Goodwill is not amortized but instead tested for impairments, where a write-down will be announced to reduce the value accordingly. Intangible assets, on the other hand, is amortized (assets that definite lives, patents, software, etc.).

So certain portions of the Excess Purchase Price is allocated to new goodwill vs. new intangible assets (80% to 20%, again for ease of use). So new amortization is just the portion of new intangible assets divided by the amortization years. Yes, non-cash charges like depreciation.

There is new amortization charges to account for the assets acquired that have definite lives, which makes deals more dilutive because there's additional charges for asset write-downs.

Hopefully that makes sense.

Remember that goodwill is no longer amortized as per FASB 141/142, instead there is the impairment test as cited above. However, identifiable intangibles (patents, etc) must be amortized and are tax deductible...

Mechanics aside, be sure you can take a step back and understand how a cash acquisition can be EPS accretive but value dilutive.

Transaction expenses relating to raising debt can be capitalized and are amortized over the life of the loan (I think) but this may change according to FASB 141R. Maybe someone else knows more about FASB 141R than I do but this was my interpretation of it.

Debt financing fees still remain the same: it is capitalized and amortized over life of loan. However, the transaction costs (IB fees, lawyers, communications, etc.) cannot be capitalized as it was before (when it was considered as part of the purchase price and therefore included in the goodwill calculation)...

Pink Money - any chance you could provide some further insight into what you mean by "value dilutive"? I understand the cash being EPS accretive....