Introduction to M&A,

Merger Models, and EPS

Accretion/Dilution
Would You Like a Synergy with Your Diluted
Share Count?
These Lessons: READ the Guide to Save Time
You can read this entire module in
written form in the Quick Reference
Guide accompanying these lessons – it
matches up fairly closely.

We focus on explanations in the written

guides and calculations in the Excel-
based videos.
This Specific Lesson: Key Rule #1 and 2
This lesson corresponds to Key Rule #1
and #2 (Why Buy Another Company? and
the Mechanics of EPS Accretion/Dilution)
in the written guide.

In fact, we’re not even going to explain

Key Rule #1 in much detail here – read
the guide for the full treatment.
This Module: Overall Plan
We’ll start with a few lessons that cover
the fundamentals of M&A deals and
merger models with simple examples.

Then, we’ll teach a short version of an

M&A case study (60 minutes), followed
by a longer one (3 hours), and cover
advanced topics in the next module.
Why Buy Another Company?
• Simple Answer: A company will acquire another company
if it thinks it will be better off after doing so

• EX: Company’s price is $100 million, but it’s “worth” $150

million according to your analysis

• EX: You could earn a 15% IRR by acquiring another company, but
your company’s Discount Rate is ~10%

• Other Reasons: Consolidation, geographic expansion, gaining

market share, acquiring new distribution channels, upselling to
new customers, diversification, defensive plays, corporate politics…
How Do You Buy Another Company?
• Cash: Usually the fastest and cheapest option – Acquirer takes its
existing Cash balance and uses it to purchase the Target’s shares

• Debt: More expensive than Cash, but cheaper than Stock in most
cases – the Acquirer must raise money and pay interest on it

• Stock: Usually the most expensive option; Acquirer issues new

shares directly to the Target or to other investors (and uses the
cash proceeds to buy the Target’s shares)

• Evaluation: One of the most important metrics for assessing deals

is EPS accretion/dilution
How Do You Buy Another Company?
• EPS: Net Income (to Common) / Diluted Common Share Count

• Why? It’s the only easy-to-calculate, common metric that reflects

all the acquisition effects! (Foregone interest on cash, interest paid
on new debt, and new shares)

• Also: Many investors focus on it, and many Boards of Directors will
not approve deals that reduce a company’s EPS

• Accretive: The Acquirer’s EPS increases after the deal closes

• Dilutive: The Acquirer’s EPS decreases after the deal closes