Question

if a company with a pe of 13x buys a company with a pe of 10x in an all-stock deal, is the deal accretive or dilutive?

Answer 1

If a company with a PE of 13x buys a company with a PE of 10x in an all-stock deal, is the deal accretive.

Other things being equal, the transaction will reduce the acquiring company's earnings per share if its Price to Earnings ratio (P/E) is lower than that of the target. This is the case because the acquiror must pay more than the market value of its own earnings for every dollar of earnings. Thus, in order to complete the transaction, the acquirer will have to issue proportionately more shares. Mechanically, proforma earnings—the numerator of EPS and the sum of the earnings of the acquirer and the target—will rise less than the proforma share count, which will result in a decrease in EPS.

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