Accretion/Dilution Calculations Flashcards

1
Q

Company A, with a P/E of 25x, acquires Company B for a purchase P/E multiple of 15x. Will the deal be accretive?

A

You can’t tell unless you know it’s a 100% stock deal.

If it is a 100% stock deal, then it is accretive because the Buyer’s P/E is higher than the Seller’s indicating that the buyer’s cost of acquisition is less than the Seller’s yield.

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2
Q

Assume company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10.

If it acquires Company B for a purchase equity value of $150. Company B has a net income of $10 as well. Assume the same tax rates for both companies. How accretive is this deal?

A

Company A’s EPS = $10/10 = $1.00

Company B purchase value is $150, so company A issues 6 shares to cover the cost (6 shares @ $25 = $150)

The combined share count is 10 + 6 =16 shares

Combined income is $10 + $10 = $20

Combined EPS is $20 / 16 = $1.25

So there is 25% accretion

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3
Q

Assume company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10.

If it acquires Company B for a purchase equity value of $150. Company B has a net income of $10 as well.

Company A uses Debt with an interest rate of 10% to acquire Company B. Is the deal still accretive? At what interest rate does it change from accretive to dilutive?

A

Calculate the WACC. 10% (1-40%) = 6%
The deal is accretive because this is less than the sellers yield is more, 6.667%

For the deal to turn dilutive, the After-Tax Cost of Debt would have to exceed 6.7%. Since 6.7% / (1-40%) = 11.1%, the deal would turn dilutive at an interest rate above 11.1%

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3
Q

Assume company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10.

If it acquires Company B for a purchase equity value of $150. Company B has a net income of $10 as well.

What are the Combined Equity Value and Enterprise Value in this deal?

Assume the original 100% Stock structure, and that Equity Value = Enterprise Value for both the Buyer and Seller.

A

Combines Equity Value = Buyer’s Equity Value + Value of Stock Issued in the Deal
$250 + $150 = $400

Combined Enterprise Value = Buyer’s Enterprise Value + Purchase Equity Value of the Seller
$250 + $150 = $400

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4
Q

How do the combined EV / EBITDA and P/E multiples change if the purchase method changes?

A

The combined P/E multiple should be in between the Buyer’s P/E multiple and the Seller’s Purchase P/E multiple.

You cannot average the P/E multiples of both companies because they may be different sizes; a weighted average also won’t work because the purchase method affects the combined multiple.

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5
Q

Now assume that Company A is twice as big financially, so its Equity Value is $500, and its Net Income is $20. Will a 100% Stock deal be more or less accretive?

A

The deal will be less accretive. The intuition is that the company that is not making the deal dilutive now has a higher weighting in all the calculations.

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6
Q

Company A buys Company B using 100% Debt. Company B has purchase P/E multiple of 10x and Company A has a P/E multiple of 15x.

What debt interest rate is required to make the deal dilutive?

A

Company B yield = 1/10x = 10%

After tax debt must be above that for it to be dilutive.

10 / (1-40) = 17%

That is an exceptionally high interest rate, 100% debt would be almost certainly accretive.

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