When investors purchase bonds at a discount, the discount must be accreted over the life of the bond. The purpose of an accretiondilution analysis sometimes also referred to as a quickanddirty merger analysis is to project the impact of an acquisition to the acquirors earnings per share eps and compare how the new eps proforma eps compares to what the companys eps would have been had it not executed the transaction. Liabilities fair value adjustments for liabilities focus on certificates of deposit and longterm borrowings. This analysis is known as the accretion dilution analysis. How an investment banker builds an accretiondilution model wall. Assume cash portion financed entirely by debt for simplicity of this exercise. Accretion dilution analysis measuring the impact of an acquisition. This is a brief introduction to the concepts and adjustments underlying accretion dilution analysis and modeling. The existing shareholders benefit from an accretion in book value per share. Oct 01, 2018 the fair value should be supported by appraisals, and many times there can be a significant difference in the fair value versus the current carrying value. Sizable dilution requires sizable savings and reasonably good execution to recover. In finance, the term accretion refers to a positive change in value following a transaction. Jul 18, 2014 an accretion dilution analysis is a common way to assess the financial impact to the combined entities earnings per share e. An acquisition creates shareholder value increases the value of shareholder stock by.
How an investment banker builds an accretiondilution model. Investors are willing to pay a premium because of the high yield and the expectation of pershare earnings growth. How to calculate accretion and amortization on the. Part of the reason for this is that there are widely held. This guide demonstrates how to perform an accretiondilution analysis that shows whether a deal creates or destroys value for shareholders of the buyer. Understanding book value for investors investorsfriend. Basically, if proforma eps accretes increases in value, the target is attractive. An accretion dilution analysis is a common way to assess the financial impact to the combined entities earnings per share e. Depending on the approach used, the calculations can vary widely within a deal.
In fact they usually are suffering a dilution of earnings per share, at least initially, but they usually are getting an accretion in book value per share. Many value investors use the price to book ratio to find undervalued stocks. Accretion dilution analysis, diluted eps, dilutive security. Accretion dilution slide from lazards pitchbook to tower group. A number of factors can cause an acquisition to be dilutive to the acquirors earnings per share eps, including. In other words, the book value of company ys equity is zeroed out. In fact they usually are suffering a dilution of earnings per share, at least initially, but they usually are getting an. In accounting, an accretion expense is created when updating the present value of an instrument. An accretion dilution analysis taken into account the funding pattern as well while calculating the effect of the merger. Even if the deal is on the table, it might not be a worthwhile. The accretion dilution bogeyman price ratios remain the most widely used multiples in valuation, but theyre also the most misused.
The basic reasoning is that given a fixed pe ratio, if eps is expected to decline as a result of the deal, price value should decline as well. Cashstock mix lets now determine whether the transaction is accretive or dilutive for various transaction prices per targetco share assuming an allstock transaction. In modeling, 20% to 25% of the purchase price above book value is often allocated toward intangible assets as a safe assumption. It is often presented in fairness opinions and deal books, in addition to dcf valuation. Now lets determine the accretion dilution for the cashstock consideration mix we have assumed for this deal over a range of possible transaction prices. I think a lot of people saw that even when earnings accretion is.
Accretion dilution model excel template stock exchange. Meanwhile,the eps accretion method models the hit to tbv and then. Accretion, which involves adjusting the cost basis price paid of the bond toward par each year that the bond is held, increases both the cost basis of the bond and the reported interest income to determine the annual accretion, find the difference between the cost of the bond. This is confusing because the existing shareholders will often claim that they are suffering a dilution. Share buybacks can be a boost to corporate earnings per share eps, but a drag on book value growth. The fair value establishes a new cost basis and depreciable lives. Accretiondilution analysis is often seen as a proxy for whether or not a contemplated deal creates or destroys shareholder value. I think they are hung up on pricing that creates sizable tbvps dilution today and eps accretion later. Accretiondilution analysis wikimili, the best wikipedia. We have set up this section of the analysis to default to a 50%50% cashstock mix in the event that the transaction assumptions call for. Accretion and dilution refer to a simple test that determines the impact an acquisition or merger has on the buying firms earnings per share eps. For instance, if the combined entity has better manufacturing.
As is the case with earnings, accretiondilution to tangible book value per share can be expressed in dollars or as a percentage increasedecrease for the acquirer on a standalone basis. In the allstock scenario, the only cash outlay required is to pay advisory and other transaction fees. Other assets and liabilities inventories, accounts receivable, debt, etc. Company y book value is subtracted from the accumulated incomedeficit, also known as retained earnings. Accretiondilution analysis tries to answer an important question when it comes to corporate acquisitions does the deal create or destroy value for shareholders of the buyer. An accretiondilution analysis taken into account the funding pattern as well while calculating the effect of the merger. An accretiondilution analysis is a way to assess the financial impact on the combined entities eps. Apr 16, 2017 when you buy a company, its difficult to tell whether it will ultimately be helpful to your earnings accretive or hurtful to your earnings dilutive. Mar 04, 2019 accretiondilution analysis is often seen as a proxy for whether or not a contemplated deal creates or destroys shareholder value. Answering this question requires analyzing what happens to earnings per share eps after the acquisition. The accretiondilution bogeyman price ratios remain the most widely used multiples in valuation, but theyre also the most misused.
If a company with a low pe acquires a company with a high. A guide for using accretiondilution analysis firmex resources. Walk me through an accretiondilution analysis ibankingfaq. This is a brief introduction to the concepts and adjustments underlying accretiondilution analysis and. How to build a merger model a basic overview of the key.
The multiples analysis section is simply copied from the purchase price ratio analysis and repeated here because it is helpful to view the multiples alongside the accretiondilution analysis. Apr 18, 2020 an accretiondilution analysis is a way to assess the financial impact on the combined entities eps. Otherwise, if proforma eps gets diluted decreases in value, the target is not attractive. Increase in net tangible book value per share attributable to new investors. Generally, shareholders do not prefer dilutive transactions. Accretion dilution breakeven premium in an allstock transaction in evaluating a potential merger, breakeven analysis is conducted to see what transaction premium can be paid before the acquisition becomes dilutive to earnings which is psychologically important. To showcase how this analysis is done, we look at the attached sample file and the following assumptions. Accretion can be thought of as the antonym of amortization.
Tbvps determines the potential value per share of a company in the. The model includes all onetime charges in the dilution and all of the costsaves in the accretion, which can make it a simpler approach. Mar 20, 2020 corporate executives often talk about accretion and dilution when explaining their capital allocation strategi. Accretion, which involves adjusting the cost basis price paid of the bond toward par each year that the bond is held, increases both the cost basis of the bond and the reported interest income. How to build a merger model a basic overview of the key steps. Fundamental value is driven from expected operating cash flows, returns on capital and the cost of capital not eps or accounting profits. Tension arises over buyers tbv dilution projections in bank deals. Corporate executives often talk about accretion and dilution when explaining their capital allocation strategi. This is a simple accretion dilution model template excel model to quickly calculate if an acquisition will create value for a public company or not download the accretion dilution model as a public company executive, or banker trying to make a buck for a prospective client, you are always thinking about increasing shareholder value. This is not true, and accretiondilution problems are a great way to weed out. Accretion dilution analysis measuring the impact of an. Accretion finance wikimili, the best wikipedia reader. The allstock transaction with differing pricetoearnings.
Note that we only computed accretiondilution for cash, rather than gaap, accounting results. Accounting accretion for fair value marks and expense savings may have a reasonable degree of certainty, but street estimates for out years tend to be optimistic except when credit is getting better. Accounting accretion for fair value marks and expense savings may have a reasonable degree of certainty, but street estimates for out years tend to. The different approaches to calculating tangible book value dilution in bank. The differentapproaches to calculating tangible book value dilution in bank deals have. Thank you for reading the cfi guide on how to build a merger model. As a result, price to tangible book value tbv became a driving metric for bank valuations and bank merger pricing. Interviewing technical questions investment banking technical interview questions including valuation, enterprise value, dcf, wacc, accretiondilution continuing with the last question, on jan.
Hey there, in this lesson, youre going to learn how to calculate accretion dilution in a merger model and tie everything together youll learn how to combine the income statements from the buyer and seller with the transaction assumptions, and calculate how the combined companys interest income expense and shares outstanding change and the impact on their bottomline. Is tangible book value per share dilution an insurmountable. Goodwill, a type of intangible asset, is created in an acquisition and reflects the value from an accounting standpoint of a company that is not attributed to its other assets and liabilities. The corporate landscape is littered with transactions than failed to live up to billing at announcement. A tangible book value per share tbvps is a method of valuing a company on a pershare basis by measuring its equity after removing any intangible assets. Accretiondilution analysis wikimili, the best wikipedia reader.
Tangible book value per share tbvps is the value of a companys tangible assets divided by its current outstanding shares. Aug 22, 2016 accounting accretion for fair value marks and expense savings may have a reasonable degree of certainty, but street estimates for out years tend to be optimistic except when credit is getting better. In calculating the pro forma interest incomeexpense, we combine several steps that we perform separately in the aftertax acquisition adjustments section of a subsequent topic on accretiondilution. A guide for using accretiondilution analysis firmex. Well the short answer is that eps accretion dilution is essentially regarded as a proxy for value creation destruction. The underlying purpose of such an analysis is to assess the impact of an acquisition on the acquirers expected future earnings per share eps. The fair value should be supported by appraisals, and many times there can be a significant difference in the fair value versus the current carrying value. Pays attention to accretion dilution in eps, how much in pretax synergies are required to break even, leverage capitalization, interest coverage, other appropriate credit statistics, and posttransaction % ownership these measures are used, in turn, to evaluate. Mar 28, 2016 as a result, price to tangible book value tbv became a driving metric for bank valuations and bank merger pricing. A tangible book value per share tbvps is a method of valuing a company on a pershare basis by measuring its equity after removing any. The allstock transaction with differing priceto earnings. Accretion dilution model free download as excel spreadsheet. Other things being equal, if the price to earnings ratio pe of the acquiring company is lower than the pe of the target, then the deal will be dilutive to the acquirors earnings per share eps.
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