Accounting Method

Finance allah shmoop what are at creative dilutive and neutral

acquisitions All right people Well it's all about the multiples

you work for boring co dot com You make stationery

roller coasters for the faint of heart And you grow

revenues at about ten percent a year All right well

your stock trades at about twelve times earnings and you

really want to buy your would be competitors Let's bounce

dot com which makes concrete bounce houses Yeah they're made

in russia What do you expect Unfortunately let's bounce has

been growing revenues at about fifteen percent but because they

make such a much more exciting than you do product

people are really into inflicting pain on themselves these days

Well they trade at thirty times earnings thirty years Fifteen

they're thirty they're willing to be bought but they'll want

thirty six times earnings for the privilege That is a

twenty percent premium toe where they trade today And they

only want stock no cash you know because the primary

shareholders would all suffer a huge tax bill if they

took cash so they'll only take stock Yours All right

So this is a conundrum You traded a low multiple

Twelve times your shareholders own you because you are a

quote value story unquote meaning that your cheap but you

are a low risk company Now if you try to

buy a growth company and pay a high multiple for

it well you risk alienating your shareholder base and that's

bad like they'll sue you in elected Different forces will

do different things but if you do buy let's bounce

while the combination would be really powerful birthday parties everywhere

would be a thrill a minute or something like that

Well the problem is that a twelve times earnings company

paying thirty six times earnings to acquire a competitors is

dilutive to that twelve times earnings company That is the

combined company If each piece were equal and they just

merged as equals a mow their m o ya that's

what they're called Well they would not have one Half

of the combined company is being valued at twelve times

earnings when it was a standalone company and then another

piece valued at thirty times as a stand alone but

combined at a price of thirty six times that's twelve

plus thirty six or forty eighth and divided by two

Companies combining here so the new company should the stock

price is all remain flat at the proposed acquisition or

merger Price set would be trading at twenty four times

earnings and we're talking really slow so you could follow

the map All right well the combination of born cohen

let's bounce would have been diluted to boring co because

it's multiple of twelve would've been diluted down via the

high multiple paid for let's bounds and the combination would

have been act creative too Let's bounce because now they're

stock will traded around twenty four times earnings instead of

thirty times earnings Right obviously had both companies traded the

same multiple of earnings when they combined Well there'd be

no dilution or at creation for either side and the

merger would simply be called neutral sort of like someone's

reaction to a roller coaster that neither rolls nor coasts

Yeah it's sort of like doing these videos are just

just keeping it real enough No we love doing good 00:03:14.905 --> [endTime] bye