Scribd
Upload
57 views4 pages

EPS Accretion

BuyCo plans to acquire SellCo in a stock-for-stock transaction, paying a 30% premium. Post-deal, the expected EPS of NewCo falls from $3.0 to $2.25, resulting in a 25% dilution for BuyCo shareholders. Ownership of NewCo is split with BuyCo shareholders holding 56.18% and SellCo shareholders holding 43.82%.

Uploaded by

Maria Zakir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
57 views4 pages

EPS Accretion

BuyCo plans to acquire SellCo in a stock-for-stock transaction, paying a 30% premium. Post-deal, the expected EPS of NewCo falls from $3.0 to $2.25, resulting in a 25% dilution for BuyCo shareholders. Ownership of NewCo is split with BuyCo shareholders holding 56.18% and SellCo shareholders holding 43.82%.

Uploaded by

Maria Zakir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

EPS Accretion/Dilution

Dr.Kumail Rizvi

EPS Accretion/Dilution

Pre-deal situation
BuyCo plans to acquire 100% shares of SellCo in a stockfor-stock transaction.
BuyCo has a net income of $300,000 and 100,000 shares
outstanding
Market shareprice of BuyCo is $50.0
Pre-deal EPS = $3.0
Pre-deal P/E = 16.7x
SellCo has a net income of $100,000 and 50,000 shares
outstanding
Market shareprice of SellCo is $60.0
Pre-deal EPS = $2.0
Pre-deal P/E = 30.0x

The deal
BuyCo agrees to pay a premium of 30% to control the firm,
so
the offer price for one SellCo share is 1.3*$60.0 = $78.
Stock-for-stock exchange ratio is $78/$50 = 1.56 of BuyCo
shares for one SellCo share
BuyCo issues 1.56*50,000 = 78,000 new shares to exchange
them for all the SellCo shares outstanding
Total shares of NewCo = 100,000(pre-deal shares of BuyCo)
+ 78,000 (new shares) = 178,000 shares
NewCo expected EPS = Total net income/Total shares
outstanding = ($300,000+$100,000)/178,000 = $2.25
NewCo expected shareprice = (P/E of BuyCo)*(expected
EPS) = 16.7x*$2.25 = $37.45

Post-deal situation
EPS of NewCo falls from $3.0 to $2.25,
so the deal is 25% dilutive for BuyCo
shareholders
BuyCo shareholders own
100,000/178,000 = 56.18% of NewCo
SellCo shareholders own 78,000/178,000
= 43.82% of NewCo

You might also like