In an all-stock M&A deal, when is the deal accretive?

In an all-stock M&A deal, when is the deal accretive?

• A. The buyer's P/E is higher than the seller's P/E.
• B. The buyer's P/E is lower than the seller's P/E.
• C. The buyer's P/E equals the seller's P/E.
• D. The deal type is independent of P/E.

Answer: (A)

In all-stock deals, a deal’s impact on the acquirer’s earnings per share (EPS) comes down to dilution from issuing new shares versus the added earnings from the target. The number of new shares issued to pay for the target depends on the buyer’s stock price relative to its earnings, so a stock with a higher price per unit of earnings (a higher P/E) is worth more per share. That means for a given value of the target, you need fewer new shares to fund the purchase when the acquirer has a higher P/E, resulting in less dilution. At the same time, you add the target’s earnings to the numerator. When the acquirer’s P/E is higher than the target’s, the combination tends to push EPS up, making the deal accretive. If the acquirer’s P/E is lower, you issue more shares and dilute EPS, making the deal dilutive; if they’re equal, the effect is roughly neutral.

In all-stock deals, a deal’s impact on the acquirer’s earnings per share (EPS) comes down to dilution from issuing new shares versus the added earnings from the target. The number of new shares issued to pay for the target depends on the buyer’s stock price relative to its earnings, so a stock with a higher price per unit of earnings (a higher P/E) is worth more per share. That means for a given value of the target, you need fewer new shares to fund the purchase when the acquirer has a higher P/E, resulting in less dilution. At the same time, you add the target’s earnings to the numerator. When the acquirer’s P/E is higher than the target’s, the combination tends to push EPS up, making the deal accretive. If the acquirer’s P/E is lower, you issue more shares and dilute EPS, making the deal dilutive; if they’re equal, the effect is roughly neutral.