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Given that a company with a PE of 10x buys another with a PE of 7x at a 30% premium. If synergies neutralise all costs related to the acquisition, is the deal accretive or dilutive?
• A quick way to find out if the acquisition is accretive or dilutive is to compare the PE of the acquiring company and that of the target. If the PE ratio that the acquirer trades on is higher than that of the target, the deal will be an accretive deal. However, if the proportionate difference between the PE of the acquiring company is lower than the premium paid then the deal is dilutive.
• In the above case the PE of the acquiring company is 43% [10x vs 7x (43% = (10/7)-1] higher than that of the target which means the deal will be accretive, despite the 30% premium paid. If the premium paid to acquire the company was more than 43% than the deal will be dilutive, rendering more difficult to sell to shareholders.
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