Question

Dilutive acquisitions result in EPS for the acquirer that reduces its pre-acquisition EPS. Example: Banc One (B1) Target Bank (T) 1,000,000 100,000 # of shares outstanding Price / share $36.00 $18.00 12 Price to Earnings Ratio (P/E) EPS $3.00 $2.00 Is an offer from Banc One to the Target Bank of 0.65 shares of Banc One stock for each share of the Target Bank (0.65:1) accretive or dilutive? EPS (seller) / EPS (buyer) = EPS (T) / EPS (B1) = Non-dilutive exchange ratio A purchase offer where the stock exchange ratio is above the non-dilutive ratio is dilutive. A purchase offer where the stock exchange ratio is below the non-dilutive ratio is accretive. EXAMPLE: Calculate the non-dilutive exchange ratio: EPS (T) / EPS (B1) = $2.00 / $3.00 =

Answer 1

Non-dilutive exchange ratio = EPS (Target Bank)/EPS(Banc One)
= $ 2/ $ 3
0.67
Non-dilutive exchange ratio = 0.67 :1
If 0.67 :1 is less than the actual exchange ratio in the purchase offer,then the offer is
dilutive
If 0.67 :1 is greater than the actual exchange ratio in the purchase offer,then the offer is
accretive.
Conclusion: the offer is accretive because the the non-dilutive exchange ratio is
greater than the actual exchange ratio
Stock exchange ratio of Purchase agreement * Purchase price per share(buyer)
= Price($ / share) paid by the acquirer
Price paid by the acquirer = 0.65 * $ 36
Price paid by the acquirer = $ 23.40
Takeover premium = (Price paid by the acquirer/Price per share(seller)) -1
= ($ 23.40 / $ 18) - 1
= 1.30 -1
Takeover premium = 0.30
Takeover premium = 30%
Since, the takeover premium is on the higher side of the 15% to 30% range,hence
the offer is fair to the target company