M&A Case Study - Synergies to Breakeven
- 01:42
Calculate the accretion or dilution of a merger deal based on the earnings per share (EPS) of the acquirer and the target. Learn how to estimate the additional synergies needed to prevent dilution if the deal is not accretive.
Transcript
The last thing to do in this section is to calculate, well, if this is dilutive, how many more synergies would you need to prevent dilution? And the easiest way of doing this is to kind of build it up. So on a sense per share basis, if I take the pre-deal, EPS forecast and I subtract the post deal EPS forecast, I need about an additional three 30 cents per share to prevent dilution. But we don't think about synergies on a per share basis. So what I'm now gonna do is I'm going to multiply this number by the shares outstanding on a post deal basis because that's what we need to affect. And that means we need about 1.4 billion of net income. But again, we don't really think about synergies on the basis of net income. We think about them as cost savings. So I'm gonna gross that up to a pre-tax number and just divide that by 1 minus the marginal tax rate. And we based our synergies on the targets marginal tax rate. So I'm gonna gross that up based on the targets marginal tax rate. And this is the cost savings incrementally that I would need each year to make that accretion dilution go away to 0. So that's another useful thing that you can show a client and say, look, actually it's dilutive but if you think you can extract more synergies of that in this case in year three of about $570 million, then this could be a reasonable transaction.