# EPS Accretion VS Value Creation In M&A

## EPS Accretion VS Value Creation In M&A

Many people perceive ๐๐ข๐ง๐๐ง๐๐ ๐๐ฌ ๐ ๐๐จ๐ฆ๐ฉ๐ฅ๐๐ฑ ๐ฌ๐ฎ๐๐ฃ๐๐๐ญ. However, in my view, ๐๐ข๐ง๐๐ง๐๐ ๐ข๐ฌ ๐ ๐ฌ๐ข๐ฆ๐ฉ๐ฅ๐ ๐ฌ๐ฎ๐๐ฃ๐๐๐ญ ๐จ๐๐ญ๐๐ง ๐ฆ๐๐๐ ๐๐จ๐ฆ๐ฉ๐ฅ๐๐ฑ ๐๐ฒ ๐๐ง๐๐ฅ๐ฒ๐ฌ๐ญ๐ฌ.

To substantiate my viewpoint, let us look at mergers and acquisitions, which are often a dreaded subject due to their abysmal track record.

Company A, whose value is Rs.100, acquired Company B, whose value is Rs.50. Firm A does not pay any premium; thus, the purchase price is Rs.50.

Firm A issues its equity by buying Firm B.
Combined value of A+B = Rs.150

Let us assume,
A’s expected earnings = Rs.5
B’s expected earnings = Rs.3
P/E of A = 100/5 = 20
P/E of B = 50/3 = 16.67

A+B’s expected earnings = Rs.8
P/E of A+B = 18.75

๐๐จ๐ฐ๐๐ฏ๐๐ซ, ๐ข ๐ก๐๐ฏ๐ ๐ฌ๐๐๐ง ๐๐ง๐๐ฅ๐ฒ๐ฌ๐ญ๐ฌ ๐ฃ๐ฎ๐ฌ๐ญ๐ข๐๐ฒ๐ข๐ง๐  ๐ญ๐ก๐ ๐๐๐จ๐ฏ๐ ๐๐๐๐ฅ ๐๐ฌ ๐ฏ๐๐ฅ๐ฎ๐-๐๐๐๐ซ๐๐ญ๐ข๐ฏ๐ ๐๐๐ฌ๐ฉ๐ข๐ญ๐ ๐ญ๐ก๐ ๐๐๐จ๐ฏ๐ ๐๐๐๐ฅ ๐๐๐๐ข๐ง๐  ๐ง๐จ ๐ฏ๐๐ฅ๐ฎ๐.

Bankers would say that after A acquires B, the stock market will apply A’s P/E to B’s earnings.

๐๐ ๐ญ๐ก๐ ๐๐๐ง๐ค๐๐ซ’๐ฌ ๐ฅ๐จ๐ ๐ข๐ ๐ข๐ฌ ๐๐จ๐ซ๐ซ๐๐๐ญ, ๐ญ๐ก๐๐ง ๐+๐’๐ฌ ๐๐ฑ๐ฉ๐๐๐ญ๐๐ ๐๐๐ซ๐ง๐ข๐ง๐ ๐ฌ = ๐๐*๐ = ๐๐๐, ๐ข๐ฆ๐ฉ๐ฅ๐ฒ๐ข๐ง๐  ๐ญ๐ก๐๐ญ ๐ญ๐ก๐ ๐๐จ๐ฆ๐๐ข๐ง๐๐ ๐ฏ๐๐ฅ๐ฎ๐ ๐จ๐ ๐ญ๐ก๐ ๐๐ข๐ซ๐ฆ ๐ข๐ง๐๐ซ๐๐๐ฌ๐๐ฌ ๐๐๐ฌ๐ฉ๐ข๐ญ๐ ๐ง๐จ ๐ข๐ง๐๐ซ๐๐๐ฌ๐ ๐ข๐ง ๐ญ๐ก๐ ๐๐จ๐ฆ๐๐ข๐ง๐๐ ๐๐๐ฌ๐ก ๐๐ฅ๐จ๐ฐ๐ฌ.

Bankers define the above as ๐ข๐ช๐ก๐ฉ๐๐ฅ๐ก๐ ๐๐ญ๐ฅ๐๐ฃ๐จ๐๐ค๐ฃ ๐ค๐ง ๐ง๐๐ง๐๐ฉ๐๐ฃ๐ย to justify their rationale.

Let us reverse our above example with Firm B acquiring Firm A. Now bankers will justify this deal as a company B with a lower P/E purchases Firm A with a higher P/E, implying B is accelerating its growth; thus, B’s P/E should expand to A.

In my view, if ๐ฆ๐ฎ๐ฅ๐ญ๐ข๐ฉ๐ฅ๐ ๐๐ฑ๐ฉ๐๐ง๐ฌ๐ข๐จ๐ง ๐ข๐ฌ ๐๐๐๐ฎ๐ซ๐๐ญ๐, ๐๐ฅ๐ฅ ๐&๐ ๐๐๐๐ฅ๐ฌ ๐๐๐ ๐ฏ๐๐ฅ๐ฎ๐, ๐๐ฎ๐ญ ๐ฐ๐ ๐ค๐ง๐จ๐ฐ, ๐ข๐ง ๐ซ๐๐๐ฅ๐ข๐ญ๐ฒ, ๐ญ๐ก๐๐ญ ๐ข๐ฌ ๐ง๐จ๐ญ ๐ญ๐ก๐ ๐๐๐ฌ๐.

๐๐ป ๐ฎ๐ป ๐ &๐ ๐ฑ๐ฒ๐ฎ๐น, ๐ถ๐ณ ๐ฎ ๐ฏ๐๐๐ฒ๐ฟ ๐ฐ๐ฎ๐ป๐ป๐ผ๐ ๐ฝ๐ถ๐ป๐ฝ๐ผ๐ถ๐ป๐ ๐๐ต๐ฒ ๐๐ฝ๐ฒ๐ฐ๐ถ๐ณ๐ถ๐ฐ ๐๐ผ๐๐ฟ๐ฐ๐ฒ๐ ๐ผ๐ณ ๐ถ๐ป๐ฐ๐ฟ๐ฒ๐ฎ๐๐ฒ๐ฑ ๐ฐ๐ฎ๐๐ต ๐ณ๐น๐ผ๐, ๐ถ๐ ๐ถ๐ ๐๐ฟ๐๐ถ๐ป๐ด ๐๐ผ ๐ณ๐ผ๐ผ๐น ๐ถ๐๐ ๐๐ต๐ฎ๐ฟ๐ฒ๐ต๐ผ๐น๐ฑ๐ฒ๐ฟ๐.

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