medium · Investment Banking ma-lbo
Company A (P/E of 20x) is acquiring Company B (P/E of 10x). The deal is financed with 100% debt at an after-tax cost of 6%.
Is the deal accretive or dilutive, and why?
- Dilutive, since the 6% after-tax cost of debt exceeds the acquirer's 5% earnings yield
- Dilutive, because the new debt raises interest expense, which lowers the pro-forma combined net income
- Accretive, because the target's 10% earnings yield is higher than the 6% after-tax cost of debt
- Accretive, because Company A's higher 20x P/E multiple compared to Company B's 10x guarantees a good deal
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