Under no circumstances are acquirors willing to accept acquisitions which are permanently dilutive. Ideally, an acquiror will structure pricing such that the merger will be accretive to EPS within a year or so once cost savings are realized. The EPS dilution model analyzes the dilutive impact of the proposed pricing based only on those shares which are issued to the seller. It is a particularly useful way to analyze potential dilution when the buyer is relatively large in relation to the seller. In such instances, the acquisition may not have a notable impact on consolidated EPS even if the pricing was highly dilutive based solely on the shares issued to the seller.
Pricing is derived by multiplying the maximum number of shares issued times the buyer's stock price.
ROE in turn consists of profitability, as measured by ROA, and leverage. A merger based upon such an exchange ratio was attractive because it was intuitively simple, and under such a structure the acquiror incurred no dilution in book value per share. Acquirors which are savvy enough to structure acquisitions which are accretive to EPS once expense savings are realized are effectively utilizing the industry's consolidation wave to boost shareholder returns by obtaining per share earnings growth which is higher than can be generated internally. Directors who sit on the boards of active acquirors should satisfy themselves that their bank's managers are actually structuring mergers which are accretive to earnings after a reasonable amount of time has elapsed. Inc. All rights reserved.