Assuming an all cash offer and excluding the effects of foregone interest, would a company with a P/E multiple of 7x acquiring a
How would you answer this interview question?
Assuming an all cash offer and excluding the effects of foregone interest, would a company with a P/E multiple of 7x acquiring a company with a P/E multiple of 5x be Accretive? If so, why?
What if foregone interest on cash was included?
Also, what if it was an all-debt deal and interest on debt was excluded? What if it was an all-debt deal and interest on debt was included?
Thanks!
Question is cut out in the title
Question is still cut out in the title, but I'm having trouble understanding why anyone would ask this question. Under what scenario would you want to exclude interest on new debt in an all-debt deal when evaluating accretion/dilution?
If you're financing a deal with all debt, the new interest from on the PF BS of the combined company is going to be the largest contributing factor to any dilution.
also, if deal is all cash, why does p/e ratio matter?
lol, fundamental misunderstanding of acc/dil. the p/e comparison is only relevant when there's stock consideration. and for it to be remotely reliable, ie 7x acquiror buying 5x target, it needs to be an all stock deal.
wrt all cash/all debt (misnomer as both are all cash, but obviously you mean all extant cash vs all debt funded), need to understand the following: all extant cash will pretty much always be Accretive, unless the acquiror is apple and it decides a 50bn deal using entirely b/s cash is a good idea, in which case the foregone interest might actually make a material impact to accretion. also need to consider target's current debt load. if you roll the debt, need to calculate the incremental interest expense the acquiror will take on. obviously same case if you refi the debt, but a refi will tend to be the better deal as you also get the deferred financing fee amort, which helps on a cash basis.
in an all debt funded deal, like someone else said, the pro forma interest expense is the single biggest factor in your merger math.
i guess in all cases, you need to consider asset step ups for gaap accretion, but those dont really make a big impact, and only affect gaap accretion anyway (note: no one cares about gaap accretion).
Questions like this are used to test the interviewee's ability to disagree with the logic on the interviewer's side in order to challenge the interviewee's comprehension of the key factors behind these concepts. So, this was a well-masked attempt to get OP to say something incorrect, given that a question like this is not found in the guides. Obviously the best students are going to learn to rig the system today, so it is fair to increase the variability in what questions are used during the process.
Dignissimos repellat quae dolores autem rem unde. Laborum qui similique repellat doloribus. Dolores aliquam distinctio fugit maxime architecto suscipit.
Vero fuga enim reprehenderit voluptas labore. Aut quaerat soluta ipsa facere non sint tempora. Voluptatem nisi itaque consequuntur aut.
Optio nemo laudantium porro qui enim incidunt. Id animi sequi quisquam amet porro quo. Ab est nihil doloribus eum alias.
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...