medium · Principles of Finance cost-of-capital-structure
Acquirer A (P/E of 20) is considering an all-stock acquisition of Target T (P/E of 12). Assuming no synergies and a market-value-based exchange ratio, the deal will be:
- Accretive, because the acquirer's earnings yield is lower than the target's earnings yield
- Neutral, because no real economic synergies are created by the combination
- Dilutive, because the acquirer pays a large premium over the target's current market price
- Accretive only if the target's future growth rate exceeds the acquirer's own growth rate
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