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?

  1. If a 22x P/E acquires a 20x P/E with 20% premium, is it a dilution or accretion? assume all stock transaction.

Thanks!

 
Best Response

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.

 

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).

 

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