In a 100% stock deal where Buyer has a 25x P/E and Seller has a 15x P/E, is the deal accretive or dilutive and why?

In a 100% stock deal where Buyer has a 25x P/E and Seller has a 15x P/E, is the deal accretive or dilutive and why?

• A. Accretive because the Seller's yield is higher than the Cost of Acquisition.
• B. Dilutive because it uses stock.
• C. Neutral.
• D. Accretive because the Buyer issues more shares.

Answer: (A)

Accretion or dilution in a stock-for-stock deal hinges on the relative P/E multiples of the buyer and the target. If the buyer’s multiple is higher, the deal tends to be accretive to the buyer’s earnings per share because the high-valued stock used to pay for the lower-valued earnings of the target adds more earnings per share than it dilutes. Think of a simple illustration: the buyer earns 10 million with 2 million shares (EPS = 5) and its stock trades at 25x earnings (price = 125). The seller earns 3 million with 1 million shares (EPS = 3) and trades at 15x earnings (price = 45). The purchase price equals seller value: 3 million × 15 = 45 million, which requires issuing 45 million / 125 = 360,000 new buyer shares. Post-merger shares = 2,360,000; combined earnings = 13 million, so post-merger EPS ≈ 5.51, higher than the pre-merger 5.0. Hence the deal is accretive. In short, paying with higher-multiple stock to acquire a lower-multiple target boosts the combined earnings per share, making the transaction accretive.

Accretion or dilution in a stock-for-stock deal hinges on the relative P/E multiples of the buyer and the target. If the buyer’s multiple is higher, the deal tends to be accretive to the buyer’s earnings per share because the high-valued stock used to pay for the lower-valued earnings of the target adds more earnings per share than it dilutes.

Think of a simple illustration: the buyer earns 10 million with 2 million shares (EPS = 5) and its stock trades at 25x earnings (price = 125). The seller earns 3 million with 1 million shares (EPS = 3) and trades at 15x earnings (price = 45). The purchase price equals seller value: 3 million × 15 = 45 million, which requires issuing 45 million / 125 = 360,000 new buyer shares. Post-merger shares = 2,360,000; combined earnings = 13 million, so post-merger EPS ≈ 5.51, higher than the pre-merger 5.0. Hence the deal is accretive.

In short, paying with higher-multiple stock to acquire a lower-multiple target boosts the combined earnings per share, making the transaction accretive.