Merger Model: Accretion Dilution

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:

  1. 100% stock-financed acquisition
  2. Zero Premium Paid
  3. 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.