medium · Principles of Finance time-value-of-money
A company is acquiring a target in a 100% stock-for-stock deal. The acquirer has a P/E of 20x and the target has a P/E of 15x. Assuming no synergies and no debt is used, the transaction will be:
- Neutral, because in a 100% stock deal, the P/E multiples cancel out in the pro-forma equity bridge.
- Accretive, but only if the target's growth rate is higher than the acquirer's required return on equity.
- Accretive, because the acquirer is using 'expensive' stock to buy 'cheap' earnings.
- Dilutive, because the target's P/E is lower, indicating lower quality earnings that will drag down the acquirer.
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