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