It looks that way, according to this analysis on the CLS BlueSky Blog. From the authors:

  • “… investors pay close attention to how stock-based deals affect the acquirer’s short-term earnings per share (EPS). Merger announcements are regularly accompanied by discussions of whether the deal will be accretive or dilutive for the acquirer’s EPS, and if immediately dilutive, how quickly the deal would turn accretive. Finance theory, however, does not imply any particular benefit of an EPS-accretive deal (in which the post-merger EPS is higher than the acquirer’s pre-merger EPS), focusing instead on whether the deal creates value.”
  • “… post-merger EPS is mainly determined by the stand-alone EPS of the acquirer and target, the incremental earnings from deal synergies, and the number of shares issued by the acquirer to finance the deal.”

The evidence the authors analyze suggests deals are structured to avoid EPS dilution and that deals which would be dilutive under an all-stock purchase are then done in cash. In short: “cash and mixed deals replace stock deals when the latter become dilutive.

Even assuming a deal is good for both acquirer and target objectively, it remains a question what portion of the deal synergies (or, more simply, value) will accrue to the acquirer versus the target. The evidence adduced by these authors is not good for the target: the target is giving up premium to have the acquirer avoid EPS dilution. The authors explain: “For deals with a range of feasible exchange ratios that allow for a premium and accretive EPS, a smooth distribution of bargaining power between acquirer and target would suggest that, for pure stock deals, the exchange ratio would also be smoothly distributed. In contract, what we find is that there is a clustering of deals just below the dilutive exchange ratio. This result suggests that the target is giving up part of the premium to enable the acquirer to avoid EPS dilution.

How is this relevant to appraisal? As readers of this blog may know, all-stock deals are not appraisal eligible (at least in Delaware), whereas stock+cash deals are appraisal eligible. This may be one factor that contributes to the “costs” which, per the author’s evidence “prevent small amounts of cash from being used to mitigate the minor EPS dilution.” In addition, the evidence suggests that target management may be willing to part with premium to assist the acquirer get the deal done – ultimately shortchanging their shareholders.

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