Introduction to M&A Strictly Confidential
Table of Contents
Quick Accretion Dilution 1
Quick Accretion Dilution 2
Accretion Dilution-Stock
Accretion Dilution-Excess Cash
Accretion Dilution-New Debt
Accretion Dilution-Mix
Summary
Pro Forma Balance Sheet
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Quick Accretion/Dilution Analysis: Example 1
All figures in USD thousands unless stated
Acquirer Target Pro Forma
Price-to-Earnings Ratio 10.0x 8.0x
Share Price 1 $14.29 $8.00
Market Cap 100,000 40,000
Net Income 10,000 5,000 15,000
Shares 7,000 5,000 9,800
Earnings per Share $1.43 $1.00 $1.53
New Acquirer Shares Issued 2,800
Alternative Calculation:
Exchange Ratio 0.56x
New Acquirer Shares Issued 2,800
Accretion / (Dilution) in $ per share $0.10
Accretion / (Dilution) in % 7.1%
Assumes a 100% Stock-for-Stock acquisition;
Assumes no premium, change in acquirer share price, synergies or additional costs. ⁽¹⁾
Intro to M&A Page 2 of 11
Quick Accretion/Dilution Analysis: Example 2
All figures in USD thousands unless stated
Alternatively, invert the multiples and you basically get an implied return on equity/cost of equity.
Acquirer Target
Price-to-Earnings Ratio 10.0x 8.0x
Implied Cost of Equity/Return on Equity 10.0% 12.5%
Positive / (Negative) Spread 2.5%
Basically the Acquirer is issuing equity with a cost of 10.0% and buying a company with a return on equity of 12.5%.
This results in a positive spread. In this case the deal will be accretive.
Intro to M&A Page 3 of 11
Quick Accretion/Dilution Analysis: Example 3
All figures in USD thousands unless stated
If the acquisition is financed entirely with debt, we can calculate the debt "P/E" ratio.
If the acquirer's debt P/E ratio is greater than the target's then the deal should be accretive.
Acquirer Target
P/E Ratio 21.7x 8.0x
After-tax Cost of Debt/Implied Return on Equity 4.6% 12.5%
Positive / (Negative) Spread 7.9%
Basically the Acquirer is issuing debt with a cost of 4.6% and buying a company with a return on equity of 12.5%.
This results in a positive spread. In this case the deal will be accretive.
Intro to M&A Page 4 of 11
Quick Accretion/Dilution Analysis: Example 4
All figures in USD thousands unless stated
Another option is to calculate the weighted average cost of the acquisition and compare it to the target's return on equity.
Cost Weights
Cash (Foregone After-tax Interest) 2.0% 20.0%
Debt (After-tax) 4.0% 20.0%
Equity 10.0% 60.0%
Weighted Cost of Acquisition 7.2%
Target's "Return on Investment"
Revenue 250,000
COGS (125,000)
Gross Profit 125,000
SG&A (50,000)
D&A (40,000)
Interest Expense (20,000)
EBT 15,000
Taxes (5,000)
Net Income 10,000
Equity Offer Value 50,000
Target ROI 20.0%
Accretive or Dilutive? Accretive
Intro to M&A Page 5 of 11
Accretion/Dilution Analysis: Stock Only
All figures in USD thousands unless stated
Transaction Inputs Sources Uses
Acquirer Share Price 25.00 Stock Issued 750,000 Stock Consideration 750,000
Target Share Price 10.00
Offer Premium 25.0% Total Sources 750,000 Total Uses 750,000
Target Offer Price 12.50
Exchange Ratio 0.500x
Stock Consideration 100.0%
Accretion/Dilution Analysis Year 1 Year 2 Year 3
Acquirer Shares Outstanding 100,000 Acquirer Earnings Before Tax 324,675 340,909 357,955
Target Shares Outstanding 60,000 Acquirer Net Income 250,000 262,500 275,625
Acquirer Shares Issued 30,000 Acquirer Shares Outstanding 100,000 100,000 100,000
Pro Forma Shares Outstanding 130,000 Acquirer Earnings per Share 2.50 2.62 2.76
Target Equity Purchase Price 750,000 Target Earnings Before Tax 135,135 148,649 163,514
1
Plus: Target Debt 15,000 Target Net Income 100,000 110,000 121,000
Less: Target Cash (40,000) Target Shares Outstanding 60,000 60,000 60,000
Target Implied Enterprise Value 725,000 Target Earnings per Share 1.67 1.83 2.02
Acquirer Tax Rate 23.0%
Target Tax Rate 26.0% Acquirer + Target Earnings Before Tax 459,810 489,558 521,469
2
Pro Forma Net Income 354,054 376,960 401,531
Pro Forma Shares Outstanding 130,000 130,000 130,000
Pro Forma EPS 2.72 2.90 3.09
Acquirer Earnings per Share 2.50 2.62 2.76
Pro Forma EPS 2.72 2.90 3.09
Alternative Acquirer Shares Issued calculation: EPS Accretion / (Dilution) 0.22 0.27 0.33
30,000 EPS Accretion / (Dilution) % 8.9% 10.5% 12.1%
Breakeven Synergies / (Dis-synergies) (37,733) (46,376) (56,128)
Alternative Stock Consideration calculation:
750,000
Assumes the target's debt is left in place at the same terms. ⁽¹⁾
Assumes the acquirer's tax rate. ⁽²⁾
Intro to M&A Page 6 of 11
Accretion/Dilution Analysis: Excess Balance Sheet Cash Only
All figures in USD thousands unless stated
Transaction Inputs Sources Uses
Acquirer Share Price 25.00 Balance Sheet Cash 755,000 Cash Consideration 750,000
Target Share Price 10.00 Fees 5,000
Offer Premium 25.0% Total Sources 755,000 Total Uses 755,000
Target Offer Price 12.50
Excess Cash 100.0%
Acquirer Shares Outstanding 100,000 Accretion/Dilution Analysis Year 1 Year 2 Year 3
Target Shares Outstanding 60,000 Acquirer Earnings Before Tax 324,675 340,909 357,955
Pro Forma Shares Outstanding 100,000 Acquirer Net Income 250,000 262,500 275,625
Acquirer Shares Outstanding 100,000 100,000 100,000
Acquirer Earnings per Share 2.50 2.62 2.76
Target Equity Purchase Price 750,000
Plus: Target Debt 1 15,000 Target Earnings Before Tax 135,135 148,649 163,514
Less: Target Cash (40,000) Target Net Income 100,000 110,000 121,000
Target Implied Enterprise Value 725,000 Target Shares Outstanding 60,000 60,000 60,000
Target Earnings per Share 1.67 1.83 2.02
Acquirer Tax Rate 23.0%
Target Tax Rate 26.0%
Interest Rate on Foregone Cash 2.0% Acquirer + Target Earnings Before Tax 459,810 489,558 521,469
Less: Foregone Interest Income (15,100) (15,100) (15,100)
Pro Forma Earnings Before Tax 444,710 474,458 506,369
Pro Forma Net Income 2 342,427 365,333 389,904
Pro Forma Shares Outstanding 100,000 100,000 100,000
Pro Forma EPS 3.42 3.65 3.90
Acquirer Earnings per Share 2.50 2.62 2.76
Pro Forma EPS 3.42 3.65 3.90
EPS Accretion / (Dilution) 0.92 1.03 1.14
EPS Accretion / (Dilution) % 37.0% 39.2% 41.5%
Breakeven Synergies / (Dis-synergies) (120,035) (133,549) (148,414)
Assumes the target's debt is left in place at the same terms. ⁽¹⁾
Assumes the acquirer's tax rate. ⁽²⁾
Intro to M&A Page 7 of 11
Accretion/Dilution Analysis: New Debt Only
All figures in USD thousands unless stated
Transaction Inputs Sources Uses
Acquirer Share Price 25.00 Debt Issued 755,000 Cash Consideration 750,000
Target Share Price 10.00 Fees 5,000
Offer Premium 25.0% Total Sources 755,000 Total Uses 755,000
Target Offer Price 12.50
Cash from Debt Consideration 100.0%
Acquirer Shares Outstanding 100,000 Accretion/Dilution Analysis Year 1 Year 2 Year 3
Target Shares Outstanding 60,000 Acquirer Earnings Before Tax 324,675 340,909 357,955
Pro Forma Shares Outstanding 100,000 Acquirer Net Income 250,000 262,500 275,625
Acquirer Shares Outstanding 100,000 100,000 100,000
Acquirer Earnings per Share 2.50 2.62 2.76
Target Equity Purchase Price 750,000
Plus: Target Debt 1 15,000 Target Earnings Before Tax 135,135 148,649 163,514
Less: Target Cash (40,000) Target Net Income 100,000 110,000 121,000
Target Implied Enterprise Value 725,000 Target Shares Outstanding 60,000 60,000 60,000
Target Earnings per Share 1.67 1.83 2.02
Acquirer Tax Rate 23.0%
Target Tax Rate 26.0%
Interest Rate on New Debt 6.0% Acquirer + Target Earnings Before Tax 459,810 489,558 521,469
Less: New Interest Expense (45,300) (45,300) (45,300)
Pro Forma Earnings Before Tax 414,510 444,258 476,169
Pro Forma Net Income 2 319,173 342,079 366,650
Pro Forma Shares Outstanding 100,000 100,000 100,000
Pro Forma EPS 3.19 3.42 3.67
Acquirer Earnings per Share 2.50 2.62 2.76
Pro Forma EPS 3.19 3.42 3.67
EPS Accretion / (Dilution) 0.69 0.80 0.91
EPS Accretion / (Dilution) % 27.7% 30.3% 33.0%
Breakeven Synergies / (Dis-synergies) (89,835) (103,349) (118,214)
Assumes the target's debt is left in place at the same terms. ⁽¹⁾
Assumes the acquirer's tax rate. ⁽²⁾
Intro to M&A Page 8 of 11
Accretion/Dilution Analysis: Mixed Offer
All figures in USD thousands unless stated
Transaction Inputs Sources Uses
Acquirer Share Price 25.00 Stock Issued 450,000 Stock Consideration 450,000
Target Share Price 10.00 Debt Issued 150,000 Total Cash Consideration 300,000
Offer Premium 25.0% Balance Sheet Cash 155,000 Fees 5,000
Target Offer Price 12.50 Total Sources 755,000 Total Uses 755,000
Exchange Ratio 0.500x
Stock Consideration 60.0%
Cash from Debt Consideration 20.0% Accretion/Dilution Analysis Year 1 Year 2 Year 3
Balance Sheet Cash Consideration 20.0% Acquirer Earnings Before Tax 324,675 340,909 357,955
Acquirer Net Income 250,000 262,500 275,625
Acquirer Shares Outstanding 100,000 Acquirer Shares Outstanding 100,000 100,000 100,000
Target Shares Outstanding 60,000 Acquirer Earnings per Share 2.50 2.62 2.76
Acquirer Shares Issued 18,000
Pro Forma Shares Outstanding 118,000 Target Earnings Before Tax 135,135 148,649 163,514
Target Net Income 100,000 110,000 121,000
Target Equity Purchase Price 750,000 Target Shares Outstanding 60,000 60,000 60,000
Plus: Target Debt 1 15,000 Target Earnings per Share 1.67 1.83 2.02
Less: Target Cash (40,000)
Target Implied Enterprise Value 725,000
Acquirer + Target Earnings Before Tax 459,810 489,558 521,469
Acquirer Tax Rate 23.0% Plus: Synergies – – –
Target Tax Rate 26.0% Less: Foregone Interest Income (3,100) (3,100) (3,100)
Assumed Annual Synergies – Less: New Interest Expense (9,000) (9,000) (9,000)
New D&A from Write-Ups (10,000) Less: New D&A from Write-Ups (10,000) (10,000) (10,000)
Interest Rate on New Debt 6.0% Pro Forma Earnings Before Tax 437,710 467,458 499,369
Interest Rate on Foregone Cash 2.0%
2
Pro Forma Net Income 337,037 359,943 384,514
Pro Forma Shares Outstanding 118,000 118,000 118,000
Alternative Acquirer Shares Issued calculation: Pro Forma EPS 2.86 3.05 3.26
18,000
Acquirer Earnings per Share 2.50 2.62 2.76
Alternative Stock Consideration calculation: Pro Forma EPS 2.86 3.05 3.26
450,000 EPS Accretion / (Dilution) 0.36 0.43 0.50
EPS Accretion / (Dilution) % 14.2% 16.2% 18.2%
Breakeven Synergies / (Dis-synergies) (54,594) (65,185) (76,982)
Assumes the target's debt is left in place at the same terms. ⁽¹⁾
Assumes the acquirer's tax rate. ⁽²⁾
Intro to M&A Page 9 of 11
Summary
All Stock Deal Year 1 Year 2 Year 3
EPS Accretion / (Dilution) 0.22 0.27 0.33
EPS Accretion / (Dilution) % 8.9% 10.5% 12.1%
Balance Sheet Cash Deal
EPS Accretion / (Dilution) 0.92 1.03 1.14
EPS Accretion / (Dilution) % 37.0% 39.2% 41.5%
New Debt Cash Deal
EPS Accretion / (Dilution) 0.69 0.80 0.91
EPS Accretion / (Dilution) % 27.7% 30.3% 33.0%
Mixed Deal
EPS Accretion / (Dilution) 0.36 0.43 0.50
EPS Accretion / (Dilution) % 14.2% 16.2% 18.2%
45.0%
40.0%
35.0%
30.0%
Balance Sheet Cash Deal
25.0%
New Debt Cash Deal
20.0%
Mixed Deal
15.0% All Stock Deal
10.0%
5.0%
–
Year 1 Year 2 Year 3
Intro to M&A Page 10 of 11
Pro Forma Balance Sheet
All figures in USD thousands unless stated
Fact Pattern
Target Acquisition Price per Share (USD) 12.50
Target Shares Outstanding 60,000
Target's Purchase Price 750,000
Equity Consideration (% of Purchase Price) 40%
1
Cash Consideration (% of Purchase Price) 60%
+ - Combined/Pro
Acquirer B/S Target B/S Transaction Adjustments Forma B/S
Cash 1,500,000 40,000 (450,000) 1,090,000
A/R 100,000 50,000 150,000
Inventory 75,000 30,000 105,000
PP&E 150,000 100,000 250,000
Intangible Assets 100,000 20,000 120,000
2
Goodwill – – 635,000 635,000
Total Assets 1,925,000 240,000 2,350,000
Accounts Payable 200,000 100,000 300,000
Accrued Expenses 150,000 10,000 160,000
Current Portion of Long-Term Debt 50,000 – 50,000
Long-Term Debt 400,000 15,000 415,000
Total Liabilities 800,000 125,000 925,000
Total Shareholders' Equity 1,125,000 115,000 300,000 (115,000) 1,425,000
Total Liabilities and Shareholders' Equity 1,925,000 240,000 2,350,000
Balance Check – – –
Assumes full cash consideration comes from balance sheet cash and not from new debt. ⁽¹⁾
Assumes no fair value adjustments to Target Assets or Liabilities. ⁽²⁾
Intro to M&A Page 11 of 11
