Accretion/dilution analysis

Simple example^[1]
Pre-deal situation: BuyCo plans to acquire 100% shares of SellCo in a stock-for-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 for control of 30%, so the offer price for one SellCo share is 1.3$60.0 = $78.0 Stock-for-stock exchange ratio is $78/$50 = 1.56 of BuyCo shares for one SellCo share BuyCo issues 1.5650,000 = 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 (so they retain control) SellCo shareholders own 78,000/178,000 = 43.82% of NewCo

Accretion/dilution analysis is a type of M&A financial modelling performed in the pre-deal phase to evaluate the effect of the transaction on shareholder value and to check whether EPS for buying shareholders will increase or decrease post-deal.^[2] Generally, shareholders do not prefer dilutive transactions; however, if the deal may generate enough value to become accretive in a reasonable time, a proposed combination is justified.

Aside is a simplified example. A real-life accretion/dilution analysis may be much more complex if the deal is structured as cash-and-stock-for-stock, if preferred shares and dilutive instruments are involved, if debt and transaction fees are substantial, and so on. Generally, if the buying company has a higher P/E multiple than that of the target, the deal is likely to be accretive. The reverse is true for a dilutive transaction.

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Corporate finance and investment banking

Capital structure

Transactions
(terms/conditions)

Equity offerings	At-the-market offering Book building Bookrunner Bought deal Bought out deal Corporate spin-off Equity carve-out Follow-on offering Greenshoe Reverse Initial public offering Private placement Public offering Rights issue Seasoned equity offering Secondary market offering Underwriting
Mergers and acquisitions	Buy side Control premium Demerger Divestment Drag-along right Management due diligence Managerial entrenchment Mandatory offer Minority discount Pitch book Pre-emption right Proxy fight Post-merger integration Sell side Shareholder rights plan Special-purpose entity Special situation Squeeze-out Staggered board of directors Stock swap Super-majority amendment Synergy Tag-along right Takeover Reverse Tender offer
Leverage	Debt restructuring Debtor-in-possession financing Financial sponsor Leveraged buyout Leveraged recapitalization High-yield debt Private equity Project finance

Valuation

This page was last edited on 29 February 2020, at 06:22

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