Ok, so after we compute the post merger EPS we compare it against the original EPS. Let’s say the new EPS is GREATER than the original EPS. I always thought this meant we are adding value.
I recently learned this is not the case as we need to see the New P/E ratio. Can someone please confirm the rule here just to be sure -
So let’s say the new EPS is greater BUT the EPS (Acquirer stock price / new EPS) is LOWER than the original EPS (Acquirer stock price / Acquirer Pre merger EPS)
Are we concluding that NO economic value has been added?
bootstrapping occurs when a high p/e firm acquires a low p/e firm.
without any benefits from the merger realized (synergies, economies of scale etc), the combined EPS will be greater than the acquirer’s EPS and you might think, THAT’S VALUE!
whether you consider this as a legitimate reason to acquire more firms is up for debate. whether this actually adds value or is just an illusion of value is also arguable.
some argue that this is bad because management would have an incentive to solely look at EPS being the indicator of whether a firm is suitable for takeover and this is the CFAI’s stance on the issue.