Series 79 practice questionmediumAccretion/Dilution Analysis
An acquirer with a P/E ratio of 20x acquires a target with a P/E ratio of 12x in an all-stock transaction. Ignoring synergies, the deal is most likely:
- ADilutive to the acquirer's EPS
- BAccretive to the acquirer's EPS✓ Correct answer
- CNeutral to the acquirer's EPS
- DCannot be determined without additional information
Explanation
Why B — Accretive to the acquirer's EPS
In an all-stock deal, if the acquirer's P/E ratio is higher than the target's P/E ratio, the transaction will generally be accretive to the acquirer's EPS. This is because the acquirer is effectively buying earnings at a cheaper multiple (12x) than what the market values its own earnings at (20x). The acquirer issues relatively fewer shares (valued at a higher multiple) to acquire the target's earnings, resulting in net EPS accretion.
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