M&A question - Accretion/dilution
Hi All,
I have two question regarding accretion/dilution:
1: Can I assume all cash transactions in M&A are all Accretive as long as the target's net income is positive?
- If a 22x P/E acquires a 20x P/E with 20% premium, is it a dilution or accretion? assume all stock transaction.
Thanks!
1) not necessarily: there are transaction/integration costs that could change the picture
2) see above
Note: this is especially true for smaller and/or less mature targets
1) see above poster 2) P/E analysis is usually a simplifying approach used only in 100% stock transactions. Assuming a 20% purchase price premium, the target P/E would increase to 24x. In this simplified case (100% stock transaction, no synergies) this would be a dilutive transaction, because you are buying the control of more expensive earnings (24x) than your own (22x). Think about it this way: you are buying 1 dollar of earnings for a price that is more than the value of your current earnings (24x vs. 22x) and hence buying the same good for a higher price.
Thanks AM.
Can I assume accretion/dilution analysis only cares about the comparison of proforma EPS with buyer's current EPS?
If you only want to know whether or not the deal is Accretive/dilutive, you compare the acquirer P/E to the offer P/E without factoring in transaction adjustments (transaction costs/synergies/purchase accounting adjustments).
To calculate the actual accr./dil. amount, compare the acquirer P/E to pro forma P/E ((acquirer NI + target NI + transaction adjustments)/(pro forma # of shares outstanding).
Above answer (another monkey's) is correct. A 100% stock deal will always be dilutive when target’s PE ratio is higher than acquirer’s. Conversely, the deal will always be Accretive when acquirer’s PE ratio is higher than target’s. So the 22x acquiring the 24x target hints at dilution.
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