J.P. Morgan Interview Question: Pre-deal situation BuyCo plan... | Glassdoor

## Interview Question

Investment Banking Associate Interview New York, NY

# Pre-deal situation BuyCo plans to acquire 100% shares of

SellCo in a stock-for-stock transaction. BuyCo has a net income of \$300,000 and 100,000 shares outstanding Market shareprice of BuyCo is \$50.0 Pre-deal EPS = \$3.0 Pre-deal P/E = 16.7x SellCo has a net income of \$100,000 and 50,000 shares outstanding Market shareprice of SellCo is \$60.0 Pre-deal EPS = \$2.0 Pre-deal P/E = 30.0x The deal BuyCo agrees to pay a premium for control of 30%, so the offer price for one SellCo share is 1.3*\$60.0 = \$78.0 Stock-for-stock exchange ratio is \$78/\$50 = 1.56 of BuyCo shares for one SellCo share BuyCo issues 1.56*50,000 = 78,000 new shares to exchange them for all the SellCo shares outstanding Total shares of NewCo = 100,000 (pre-deal shares of BuyCo) + 78,000 (new shares) = 178,000 shares NewCo expected EPS = Total net income/Total shares outstanding = (\$300,000+\$100,000)/178,000 = \$2.25 NewCo expected shareprice = (P/E of BuyCo)*(expected EPS) = 16.7x*\$2.25 = \$37.45 Post-deal situation EPS of NewCo fall from \$3.0 to \$2.25, so the deal is 25% dilutive for BuyCo shareholders BuyCo shareholders own 100,000/178,000 = 56.18% of NewCo SellCo shareholders own 78,000/178,000 = 43.82% of NewCo http://en.wikipedia.org/wiki/Accretion/dilution_analysis