5.1·6 min read

The P/E Rule of Thumb

In an all-stock deal, a higher-P/E buyer acquiring a lower-P/E target is accretive. The reverse is dilutive.

By the end you can

✓Apply the all-stock P/E rule
✓Use the deal P/E (offer price), not the market P/E

The rule

All-stock deal, before : if the buyer's P/E is higher than the P/E it pays for the target, the deal is . If the buyer's P/E is lower, it's .

The intuition: in a stock deal you're swapping your shares for the target's earnings. If your stock is richly valued (high P/E), each share you give up buys a lot of the target's cheaper earnings - so EPS rises. Use the deal P/E (, including the ), not the target's pre-deal market P/E.

\text{Deal P/E} = \frac{\text{Offer Value}}{\text{Target Net Income}}

The premium raises the deal P/E above the target's market P/E, making accretion harder.

Worked example · Apply the rule

Given

•Buyer trades at 20.0x
•Target acquired at a of 15.0x
•100% stock, no

Solution

1.Compare
$20.0\times > 15.0\times$

Answer

Buyer P/E exceeds the , so the all-stock deal is even before any .

Check yourself

A 12.0x P/E buyer acquires a target at a 16.0x deal P/E, all stock, no synergies. The deal is:

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