Lec 7

Sub: MACR
Date: 7th July, 2022

Accretive, Dilutive and Neutral Acquisitions:

Accretive (This is with Merger Model and not acquisition): An acquisition is

accretive when combined EPS is greather than acquirer's standalone EPS.
An acquisition is 'dilutive' when the combines EPS is lower than the pre-
acquisition EPS of the acquirer.
The effect of merger is going to play its role. Accretive means whether the merger
is effective.
A deal is considered to be breakeven or neutral when there is virtually no impact
tot he post acquisition EPS of the combined entity.
EPS accretion/dilution is essentially regarded asa proxy for value
creation/destruction.
PE reatio gives the equity multiple, whereas EV to EBITDA gives the firm multiple.
For enterprise value EBITDA multiple use.

Example:
Earnings (PAT) A ltd B Ltd Combines
Earnings 500000 200000
Nor of shares 100000 50000
EPS 5 4
PE 6 6
Market price 30 24
B shares taken over by A at Rs 20 @swap ratio of 2:3
Answer: Therefore PE = 5
AnswerMarket Price (EPS of combined Company) =
5.25 = EPS, 133000 shares to be issued.

Answer: It is accretion
Same case if it is 25 instead of 24, then EPS = 4.94,

How that Rs 24 is becoming neutral? Where exactly the acquirer should concentrate
to decide the price?
If high PE is acquiring low PE company then company is Accretive.

Merger Model Slide:

In this case, calculate Market price, market capitalisation, earnings, everything
you can calculate now.
Calculate the number of shares that acquirer has to give the target by considering
the market value.
Answer:
Steps:
First decides the market price
Find swap ratio
Then Combined basis earnings
Combined basis EPS
Then tell whether it is accretive or dilutive.

Answer: 409 shares, combined earnings = Rs 4375

Exxon Acquisition of Mobile (Pre Merger)

Swap Ratio?
Total Earnings?
Combined EPS?
New Shares = 1029 shares
Swap Ratio = 1.319 (1033 shares will be issued)
 95 is the fair value of the target entity and 72 of the acquirer
Therefore, 95/72 = 1.319
No shares = 1029
Total shares = 3458
Total earnings = 3682

Quaker acquisition of Snapple

New PE Ratio = 28.57 (14/0.48)

'Cash-for-stock' Acquisitions slide

If you are having cash, opportunity cost is lost
If you are borrowing, debt is resulting in interest.

Cash Payment on Share Purchase

What about Earnings per Share (EPS)? Slide

A Case Analysis:
Calcualte EPS:
Assumptions: Acquirer is ready to pay premiums mentioned below in the excel sheet.
EPS before merger, after merger, accretive/dilutive in each year.

Answer: