Interview Question on Merger Consequences Analysis
I've had a couple of interviews and have generally been well prepared.
However, earlier this week, I was tossed a question that I thought I knew the answer to, but now am not sure.
At one interview, one of the interviewers asked me about merger consequences/accretion-dilution analysis. I thought I gave him a pretty decent explanation, but at the end he asked me if it was possible to do this type of analysis when the target company is private.
I told him that I didn't think this was possible since private companies don't have EPS, but now that I think about it am I maybe missing something? Is there a way to tell if an acquisition of a private company is going to be accretive or diluative?
If I'm not mistaken, if the target has a negative NI or if negative synergies are expected from the deal then the merger would be dilutive.
i don't see how this would be possible considering it would almost always be accretive, since the other company has no shares...
I would think it is possible. Like the above poster said, if NI is negative then of course it is dilutive. Also, it depends on if it is a stock or cash acquisition. If stock is used, it might be dilutive. So I would say that it can be done using projections (but then again, I am in college and don't know anything for sure...so yeah)
I would think if you can get a valuation on the firm and figure out how much shares or cash/debt you need you can figure out the effect of the merger. You won't get the quick and dirty way of using P/E but it is fairly straight forward to figure it out.
The answer is yes, you can do an accretion/dilution if the target is private. It works exactly the same way as if the target is public. You just need the equity purchase price (or valuation) and you need the target's net income. Divide the purchase price by the target's net income and you get the P/E ratio, which you can compare to the buyer's P/E. Same as for a public/public deal, in a stock transaction if the target's P/E is lower then the deal will likely be accretive and vice versa.
You definitely can. I work in corporate development for a PE-backed company so most of the deals we work on involve both a private buyer (us) and a private target. Private companies have shares and earnings per share just like public companies.
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