relative P/E

If the acquirer’s P/E is lower than the offer P/E, the value of the currency of the acquirer is lower. If the acquirer’s share is “worth” less, it will issue more shares, causing a more dilutive result. Why would the acquirer want to dilute the shares of its stock even more? i dont understand the logic of it.

My interpretation: If you read the passage carefully, they are not saying they want to issue more shares for dillution, just that they will HAVE to issues more shares causing a dilutive result. The reason they have to issue more shares is because the target costs more on a relative basis then the buyer.

bmwhype Wrote: ------------------------------------------------------- > > Why would the acquirer want to dilute the shares > of its stock even more? i dont understand the > logic of it. what the predator hopes for (and thats generally not what happens as recent history has illustrated) is that its own shares re-rate to the same higher PE of the acquired company this re-rating rationale was used a lot in the bubble and immediate post bubble years to justify expensive acquisitions

Dont forget about synergies. acquirer is typically expecting to get higher earnings out of target company than they bought. So if target earns $10 at a 10x p/e and acquirer is trading at a 9x p/e but expects to make $15 from target’s business due to synergies, then they spent $100 but it is now worth $135 based on higher earnings at a lower multiple. Another way to see that is that they expect to make $15, not $10, so the $100 purchase price is not 10x, but rather 6.7x. Therefore, in the end they expect it to be accretive. There is some validity to the post above, but this is a much more likely expectation.

The whole concept is ridiculous. Relative P/E is the lazy man’s valuation tool.

Think of it this way…If a buyer thinks his stock is over valued, he is more likely to issue stock rather than fund the deal with debt. The stock issue would dilute the buyer’s EPS and the hope is that it lowers the stock to the right valuation.

Etienne, What do you think is a hard working man’s valuation tool if P/E is the lazy way?

Well, one more principled alternative would be to discount expected cash flows at an appropriate cost of capital.

I believe a DCF is just as lazy. With minimal experience running a DCF, you can get it to say any target you want it to say. Tweak the beta (which is an estimate), tweak the TV growth rate (estimate), tweak the market risk premium (estimate), tweak the last years margins (estimate) and so forth. I think saying that running a DCF has more value than looking at what the market is willing to pay for an asset isn’t 100% correct either… just some random thoughts to spark a debate.