By: Gopal Krishan 09BS0002792

What happens after an acquisition 
Real performance changes due to target

earnings and synergies, the ³real accretion´  The negative or dilutive effects of accounting rules and payment methods on reported EPS, which is define as ³accounting accretion³  According to changes in the EPS, the value of the company change assuming the P/E ratio remains constant

A change in current and future EPS due to

acquisition  Sensitivity analysis using different combinations  Annual EPS accretion for the surviving entity is the difference between the expected postmerger EPS of the combined acquirer and target and the expected EPS of the acquirer as a standalone entity

Why accretion/dilution 
Indirect relationship between the consideration

and future EPS
Because of too much debt servicing Because of too many acquirer shares issued 

Overpayment for a acquisition reduces the

value of the acquirer  Stock returns are negatively related to the amount over-paid  Method of acquisition makes a difference too

Calculation of Post-merger EPS 
The sum of the earnings corresponding to the original

acquirers¶ operations and incremental earnings from the target, including any potential synergies  Less the after-tax effect of added interest expense, incremental depreciation and goodwill amortization, as well as dividends on any preferred stock issued in connection with the deal  All divided by total common shares outstanding at the time of the acquisition, including incremental shares issued in the merger

Concept of synergies 
Synergies is merging of operational areas of

the companies which results either in reduction of costs or increase in revenues  The reduced costs or increased revenues are termed as synergy and are expressed in fraction or percentage.

What else can be tested? 
Exchange ratio is a function of the premium  Accretion/Dilution can test the affect of

change in premium over the EPS  Different interest rate scenario  Synergy levels have an impact on the future EPS

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