Dilutive acquisitions result in EPS for the acquirer that reduces its pre-acquisition EPS. Example: Banc One (B1) Target Bank (T) 1,000,000 100,000 # of shares outstanding Price / share $36.00 $18.00 12 Price to Earnings Ratio (P/E) EPS $3.00 $2.00 Is an offer from Banc One to the Target Bank of 0.65 shares of Banc One stock for each share of the Target Bank (0.65:1) accretive or dilutive? EPS (seller) / EPS (buyer) = EPS (T) / EPS (B1) = Non-dilutive exchange ratio A purchase offer where the stock exchange ratio is above the non-dilutive ratio is dilutive. A purchase offer where the stock exchange ratio is below the non-dilutive ratio is accretive. EXAMPLE: Calculate the non-dilutive exchange ratio: EPS (T) / EPS (B1) = $2.00 / $3.00 = If ______ _(a) is less than the actual exchange ratio in the purchase offer (0.65 shares of B1 for each share of the Target), then the offer is dilutive. If _(a) is greater than the actual exchange ratio in the purchase offer (0.65 shares of B1 for each share of the Target), then the offer is accretive. Conclusion: the offer is accretive (or non-dilutive). Is this offer fair to the target company? (Typical premiums range from 15-30%, higher is better for a target.) Price Stock Exchange Ratio of Purchase Agreement x Price per share (buyer) ($/share) paid by Acquirer Takeover Premium = [Price paid by acquirer / Price per share (seller)] - 1 EXAMPLE: 0.65 share B1 x $36.00 per share of B1 stock = __$__________ (b) Takeover Premium = [. _(b) / $18.00] - 1