Accretion/Dilution analysis
Why M&A is all about PE Game?
Here I will explain with the help of Accretion/Dilution Analysis.
- First Scenario, 100% Stock and 0% Cash (No Synergies)
Here in this case why I am getting zero accretion/dilution because my target PE is equal to implied target PE. We can calculate PE of a Target from the formula given below.
Target PE = Purchase Price/Net Income of Target
Target PE = $39825/$2287 = 17.4x
Both the acquirer and target PE are the same so, no profit no loss i,e Breakeven point. That's why no Accretion/Dilution.
2. 100% Cash and 0% Stock (No synergy)
In this case, Implied PE of the target is equal to Implied PE of cash which is equivalent to 25.6x. My implied PE is simply inverse of the interest rate.
Let's see how I calculated the Implied PE.
Interest Rate = 7%
Implied PE = 1/7%*(1-35%) = 25.6x
This means on all cash basis I can afford to pay 25.6x, whereas on stock basis I can afford to pay only 17.4x.
3. 50% Cash and 50% Stock (Synergy Created)
In this method, at the acquirer's EPS of 2.72 it will create the highest percentage of accretion.
