M&A Case Study - EPS Accretion and Dilution
- 02:31
Calculate the accretion dilution of a merger and acquisition deal using a pro forma income statement and share count. Using an example of a dilutive deal between Pepsi and Coca-Cola, and explains the impact of equity funding and synergies on the earnings per share.
Transcript
Now we're gonna compare that to the existing shares because actually post deal, the shares that we really care about are the acquirer shares. So we start with the acquirer shares. I'll absolutely reference that. And then what we're going to do is we're gonna calculate how many new shares of the acquirer that we need to issue. Well, to do that, if I go to the sources of funds, we want to raise about $61.3 billion because remember, that's all dollarized now, in equity. So we need to hand over shares equal to that amount. So if I take that number and I divide by the acquirer's share price, which is 59.6, that means I need to issue about a billion shares to satisfy that equity consideration. In other words, I'm just assuming that I can satisfy it by issuing stock to the target shareholders in Coca-Cola. But obviously they're going to want that stock issued at the current price. And that means we need to issue those number of shares. So the funding by equity gets reflected not in the earnings number, but in the share count number. And that affects EPS rather than net income. So if we compare the pre-deal, EPS, which was forecast by the consensus estimates in CY1, we have about $2.89. And then in the future years it was 309 and 330. And I see growing EPS, and now we can recalculate what would happen to that number if this transaction takes place. So we'll take the proforma net income divided by the proforma diluted shares outstanding. So this is after all those transaction effects, both on the income statement and in the share count number. And you can see actually in the first year, this is dilutive because our EPS forecast is going down, still dilutive in the second year, still dilutive in the third year, even with the full run rate of synergies. So the accretion dilution we can calculate by taking the post deal EPS divided by the pre-deal, EPS minus 1. And this means that this is gonna be dilutive transaction. The question is, why would that be?