With respect to EPS, post-merger earnings of two companies are summed, however, this is not the case with the number of shares outstanding. Why is this?
If shares of the acquired company are exchanged 1 to 1 with parent’s shares, then yes, it will be a simple sum of outstanding shares of the 2 companies. But, usually, acquired company’s shares are not converted 1 to 1 with parent’s shares.
Ok, so i looked it up and found: When a high PE firm acquires a low PE firm and uses stock for the acquisition: the exchange ratio of shares is less than 1. Therefore, the number of shares after the merger will be less than the sum of shares of the two companies pre-merger. However, the earnings of both companies are summed. Therefore, the EPS post-merger will increase.
In short, Big P/E stock price > Small P/E stock Exchange will prolly be 1 for more than 1 And look at Earnings/Total no. of Shares Earnings would’ve increased additively but the total no. of shares post M&A will be less than the sum of the two pre M&A To properly factor this, analyst should use weighted average on earnings (i think)