Question

In: Finance

Company A is going to acquire Company B through a stock-for-stock transaction in which Company A...

  1. Company A is going to acquire Company B through a stock-for-stock transaction in which Company A will offer 0.5 share for each share of Company B. You are given the following information:

Company A

Company B

Share Price

$60.00

$20.00

Earnings Per Share

5.00

1.00

Number of Common Shares

20 million

10 million
  1. Calculate each stock’s price/earnings multiple.
  2. Calculate the percentage control premium Company A is offering.
  3. Will the transaction be dilutive or accretive to Company A? Explain.
  4. Calculate the amount of any dilution/accretion in earnings per share.  

Solutions

Expert Solution

a) Company A's PE (price to earnings) multiple = 60 / 5 = 12.0x; Company B's PE multiple = 20 / 1 = 20.0x

b) Company A's offer = 0.5 shares = 0.5 * 60 = $30 per share of Company B

Hence, control premium offered = (Offer price - target share price) / target share price = (30 - 20) / 20 = 50%

c) When the acquiring firm's PE ratio is lower than the target firm's PE ratio, in an stock deal the transaction will be dilutive to the acquirer. This is because, essentially the acquirer is using lower valued (PE) paper (stock) to buy higher valued paper. Hence, the above transaction is dilutive to Company A.

d) Pro forma net income of Company A + Company B = (EPS * shares outstanding of company A) + (EPS * shares outstanding of company B) = 5 * 20 + 1 * 10 = $110M

Number of shares to be issued by Company A = exchange ratio * number of Company B shares outstanding = 0.5 * 10 = 5M

Pro form shares outstanding = 20 + 5 = 25M

Pro forma EPS = pro forma net income / pro forma shares outstanding = 110 / 25 = $4.40   

Hence, EPS dilution = original Company A EPS - pro forma EPS = 4.40 - 5 = -$0.60 per share

jeff jeffy answered 2 years ago
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