Skip to content
Rob's 2700 Notes

👨‍🏫 Notes

MERGERS & ACQUISITIONS Expected Earnings Post-Tax Earnings Market Cap # New Shares (typical) Share Exchange Ratio New Earnings Total New Shares Outstanding (New SO) New Earnings Per Share New P/E Ratio Reference: 12 April 27.pptl Equations = (Possible Earnings * Probability) + (Possible Earnings * Probability) = Earnings * (1- tax rate) = Share Price * Total Shares Outstanding = Targets Mkt Cap (l+premium) / Acquirer's share price = # New Shares / Target's Shares Outstand = Acquirer's Earnings + Target's Earnings = Acquirer's SO + # New Shares = Acquirer's SO + Exchange Ratio * Target SO = New Total Earnings / New Shares Outstanding = New share price / New EPS Example = (15*60%) + (27.5*40%) = (1- 35%) -6.5 = \$50 * 2M = \$100 M = 20 = 60M * (1+0%) / \$100 = 600,000 600,000 / 1 M = .60 Exchange Ratio = 5M +5 M = 10 M New Total Earnings - 1M + 600K = 1.6 M SO in combined co = / 1.6 M = \$6.25 EPS = \$100/ 6.25 = 16 P/E Ratio

There is a bit of a recipe:
1.) General Principal is that the value of the merged company is A+T+S, ie Combined Market Cap = Acquirer MC + Target MC + Synergies.
2.) Acquirer’s shares turn into shares of combined company, 1 for 1. New Shares = Targets Mkt Cap (1+premium) / Acquirer’s share price Total # of shares = # of old acquirer shares + # of new shares.
3.) Share Price = Combined Market Cap / Total # of shares.
4.) Return = 100%*(New Share Price - Old Share Price)/(Old Share Price) Or (New/Old-1)*100%