medium · Investment Banking ma-lbo
A company with a P/E multiple of 15x acquires a target with a P/E multiple of 10x in an all-stock deal.
Ignoring synergies and transaction costs, is the deal accretive or dilutive?
- Accretive, but only if the target's net income is larger than the acquirer's interest expense.
- Dilutive, because the target's earnings yield is higher than the acquirer's cost of equity.
- Dilutive, because the acquirer's share count increases to fund the acquisition.
- Accretive, because the acquirer is using 'expensive' stock to buy 'cheap' earnings.
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