I’m going to show a quick back of the envelope Merger Model calculation for EPS Accretion Dilution and the EPS impact to this Merger Model example.
Let’s make the following assumptions for our Merger Model:
- 100% stock-financed acquisition
- Zero Premium Paid
- Zero Transaction Synergies
Acquiror: $3.25 EPS, P/E 11.0x, Shares 1,000
Target: $3.75 EPS, P/E 13.0x, Shares 300
- Bottom Line: Transaction will be Dilutive
- Calculative Acquiror Info: Total Earnings $3,250, Total Price: $35,750, Price/share $35.75
- Calculative Target Info: Total Earnings $1,125, Total Price: $14,625, Price/share $48.75
- Thus Acquirer will have to issue 409 new shares to acquire the Target at market price ($14,625/$35.75)
- Pro Forma for transaction the acquiror will have shares of 1,409 (1,000 + 409)
- New combined earnings of $4,375 ($3,250 + $1,125), this assumes zero synergies
- New EPS of $3.10 ($4,375/1,409)
- New EPS of $3.10 is less than pre-transaction EPS of $3.25
- Thus transaction is Dilutive to the acquirers EPS
Merger Model Follow-up question: At what price would the M&A transaction become breakeven?
For a more detailed breakdown of Investment Banking Valuations and Merger Models check out the Street of Walls Technical Interview Guide.