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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

A bidder with a higher P/E ratio than the target acquires it using a share exchange at the target's current market value with no premium and no synergies. What is the usual effect on the bidder's EPS?

EPS normally rises, because a bidder with a higher P/E than the target issues relatively few shares to buy each dollar of target earnings. Earnings grow proportionately more than the share count, producing a bootstrap increase in EPS even without synergies.

  1. AEPS rises, because fewer bidder shares are issued per unit of target earningsCorrect
  2. BEPS falls, because more bidder shares are issued per unit of earnings
  3. CEPS is unchanged because values are equal
  4. DEPS cannot be determined without knowing gearing

Explanation

A higher bidder P/E means the bidder's shares are valued highly relative to earnings, so it issues relatively few shares to buy the target's earnings. Earnings acquired grow proportionately more than shares, so EPS rises (the 'bootstrap' effect).

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